Demographic change and the rate of return in pay-as-you-go pension systems

Abstract

The ongoing demographic change in most developed countries consists of two coinciding independent developments that differ in structure and persistence: A slow, monotonic and (presumably) permanent longevity effect caused by an increasing life expectancy; and a more rapidly changing, non-monotonic and less permanent cohort effect caused by fluctuations in the size of cohorts. This paper shows the longevity effect has a positive impact on the rates of return households generate within a pay-as-you-go (PAYG) pension system. The cohort effect, by contrast, results in winners and losers in PAYG systems.