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date: 15 January 2021

Abstract and Keywords

In employer-provided pension plans and individual retirement saving accounts, contributions over the working lifetime are used to purchase assets that are drawn down after retirement. In contrast, public pension systems typically use pay-as-you-go (PAYG) finance. With PAYG finance, current revenue to the program – which may be derived from a tax on payroll or from general taxation, – is used to finance current pension expenditure. Such a pension program is therefore a form of tax-and-transfer system, akin to other elements of the public welfare program. Given these general issues, this article describes an actuarial-based system and contrasts it with an explicitly redistributive program. It then delineates four dimensions in which public pension systems diverge from this actuarial benchmark, providing actual illustrations for OECD countries. The next section considers the limited empirical evidence on whether, in practice, deviations from an actuarial basis to the public pension system actually affect household behaviour.

Keywords: pension plans, retirement saving accounts, public pension systems, PAYG finance, tax and transfer, household behaviour

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