The Relation between Demography and Economics with Special Reference to the Role of Mandatory Funded and Unfunded Old-Age Pensions

37 Pages Posted: 16 Mar 2012

See all articles by B.M.S. van Praag

B.M.S. van Praag

University of Amsterdam - Faculty of Economics and Business (FEB); IZA Institute of Labor Economics; Tinbergen Institute in Amsterdam; CESifo (Center for Economic Studies and Ifo Institute)

J. Peter Hop

University of Amsterdam

Date Written: March 12, 2012

Abstract

In this paper we consider the influence of the demography on the dynamic equilibrium of an economy. More precisely, we focus on mandatory pensions, as in most Western countries except USA and Switzerland the role of ‘the third pension-pillar,’ based on voluntary savings, is relatively minor. Our first main result is that the interest rate in a two-pillar system (PAYG and mandatory pensions) is increasing with the birth rate. This finding would give a theoretical underpinning for the actual conjecture that real long-term interest rates over the world tend to fall in line with falling birth rates. The second result is that the mix between mandatory funded and unfunded systems may be seen as an endogenous result of the system. If the birth rate is rising, the role of the unfunded system declines or even vanishes, while inversely with falling birth rate the role of the unfunded system appears to grow. A third important result is that average utility or welfare increases with increasing birth rates, while at the same time inequality between workers and retired, measured by the benefit ratio, appears to reduce. A final essential result is that a pension system built on a funded and an unfunded component does better in terms of average welfare than a system which consists of a funded system only, except for very low birth rates where a mandatory funded system only yields higher average welfare.

Keywords: Demography, funded pensions, unfunded pensions, social security, interest rate

JEL Classification: H55, H75, J1, J26

Suggested Citation

van Praag, Bernard and Hop, J. Peter, The Relation between Demography and Economics with Special Reference to the Role of Mandatory Funded and Unfunded Old-Age Pensions (March 12, 2012). Netspar Discussion Paper No. 03/2012-005, Available at SSRN: https://ssrn.com/abstract=2024847 or http://dx.doi.org/10.2139/ssrn.2024847

Bernard Van Praag (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
31 20 5256018 (Phone)
31 20 5256013 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Tinbergen Institute in Amsterdam

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

J. Peter Hop

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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