The unfunded PAYG pension system in the context of population ageing: How to ensure its financial sustainability. The role of fertility, human capital, and immigration
Carnal, Yoann (2020)
MGE - Master's Degree Programme in Public Economics and Public Finance
Johtamisen ja talouden tiedekunta - Faculty of Management and Business
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This thesis deals with the sustainability of unfunded public pension systems in the context of population ageing. The objective of our paper is first to provide the theoretical basis for the pay-as-you-go (PAYG) mechanism, and second to analyse empirically whether this system can be financially sustainable even when the population is ageing. The thesis involves a theoretical introduction to overlapping generations models and capital accumulation. This helps to understand the impact of the introduction of social security on savings. It is stressed that an unfunded rather than a funded pension system is more relevant for providing adequate and sustainable pension benefits, even if it must face some challenges in the coming years. Population ageing jeopardises the financial situation of the PAYG systems. It is shown that population ageing, resulting either from declining fertility or increasing life expectancy, is not detrimental to pension systems as long as the productivity of contributors to the plan is encouraged. Investments in education play an important role in coping with population ageing. In addition to investing in human capital, immigration policies can be seen as a means of ensuring the financial sustainability of PAYG pension systems in some cases. It is demonstrated that immigration cannot offset the negative impact of population ageing on the sustainability of the pension systems. Finally, we discuss potential reform proposals for the Swiss pension system, while considering the difficulties in getting reforms accepted in Switzerland due to the political system.