Public Economics pp 245-320 | Cite as

# Pensions

## Abstract

In this chapter, we first review empirical facts of public pension systems in OECD countries. Subsequently, we introduce a public pension system in the standard two-period overlapping generations (OLG) model of Chap. 2. We consider two different social security systems, pay-as-you-go (PAYG) versus fully funded. While a fully funded pension system does not have any effect on aggregate savings if capital markets are perfect, aggregate savings fall significantly in a PAYG system. Since public pensions are likely to distort household labor supply decisions, we endogenize labor supply below. In addition, we extend the two-period model to a more realistic 70-period model in which the retirement period is smaller than the working period. Next, we derive the optimal amount of pensions in a PAYG system and study how the demographic transition and aging of the population affect the sustainability of social security. We also discuss the findings of the literature on quantitative pension studies in detail. Finally, we introduce the concept of fiscal space and point out its sensitivity with respect to the aging that takes place in many industrialized countries at present.

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