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date: 21 August 2019

Abstract and Keywords

A key issue in pension reform is whether such a shift from PAYG to funding is largely a matter of reallocation of the financial burden of ageing (with the risk of a generation paying twice), or whether funding improves economic performance sufficiently to generate some or all of the resources required to meet the needs of an ageing population. The underlying issue is that with characteristics such as greater actuarial fairness, transparency, and flows of funds to securities markets, a funded system may prompt greater economic efficiency than PAYG, which is of wider benefit to the economy. There are several aspects to this question. One is whether funding leads to an increase in saving, which permits higher capital formation. A second is whether, independently of the impact on saving, there are effects of funding that lead to higher economic growth, for example via positive externalities generating more efficient capital and labour markets. A third is whether a direct impact of funding on growth can be discerned. We investigate the literature on these issues and seek to draw conclusions.

Keywords: pension funding, economic growth, PAYG, economic performance, economic efficiency, capital formation, labour markets

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