Abstract
Based on explicit presentvalue calculations, the paper criticizes the view that the PAYGOsystem wastes economic resources. In present value terms, thereis nothing to be gained from a transition to a funded systemeven though the latter offers a permanently higher rate of return.The sum of the implicit and explicit tax burdens that resultfrom the need to respect the existing pension claims is the sameunder all systems and transition strategies. Nevertheless a partialtransition to a funded system may be a way to overcome the currentdemographic crisis because it replaces missing human capitalwith real capital and helps smooth tax and child rearing costsacross the generations.
Similar content being viewed by others
References
Aaron, H. (1966). “The Social Insurance Paradox.” Canadian Journal of Economics and Political Science 32, 371-374.
Beckmann, K. (2000). “A Note on the Tax Rate Implicit in Pay-as-you-go Public Pension Contributions.” Finanzarchiv, forthcoming.
Börsch-Supan, A. (1998). “A Public Pension System on the Verge of Collapse.” In H. Siebert (ed.), Redesigning Social Security. Mohr Siebeck: Tübingen.
Breyer, F. (1989). “On the Intergenerational Pareto Efficiency of Pay-as-you-go Financed Pension Schemes.” Journal of Institutional and Theoretical Economics 145, 643-658.
Brunner, J. K. (1996). “Transition from a Pay-as-you-go to a Fully Funded Pension System: The Case of Differing Individuals and Intragenerational Fairness.” Journal of Public Economics 60, 131-146.
Buchholz, W. (2000). “Efficiency of Pension Schemes. A Note.” Mimeo, University of Regensburg.
Corneo, G., and O. Jeanne. (1997). “On Relative Wealth Effects and the Optimality of Growth.” Economics Letters 54, 87-92.
Diamond, P. (ed.). (1999). Issues in Privatizing Social Security, Report of an Expert Panel of the National Academy of Social Insurance. Cambridge, Mass., London, England: MIT Press.
Feldstein, M. (1995). “Would Privatizing Social Security Raise EconomicWelfare?” NBER Working Paper 5281.
Feldstein, M. (1997). “Transition to a Fully Funded Pension System: Five Economic Issues.” NBER Working Paper 6149.
Feldstein, M., and A. Samwick. (1998). “The Economics of Prefundung Social Security and Medicare Benefits.” In H. Siebert (ed.), Redesigning Social Security. Mohr Siebeck: Tübingen.
Fenge, R. (1995). “Pareto-Efficiency of the Pay-As-You-Go Pension System with Intragenerational Fairness.” Finanzarchiv 52, 357-363.
Fenge, R. (1997). Effizienz der Alterssicherung. Heidelberg: Physica.
Fenge, R., and J. von Weizsäcker. (1999). “To What Extent are Public Pensions Pareto-Improving? On the Interaction of Means Tested Basic Income and Public Pensions.” CESifo Working Paper 197.
Geanakopolos, J., O. S. Mitchell, and S. P. Zeldes. (1998). “Would a Privatized Social Security System Really Pay a Higher Rate of Return?” NBER Working Paper 6713.
Homburg, S. (1990). “The Efficiency of Unfunded Pension Schemes.” Journal of Institutional and Theoretical Economics 146, 640-647.
Homburg, S. (1991). “Interest and Growth in an Economy with Land.” The Canadian Journal of Economics 24, 450-459.
Homburg, S. (1997). “Old Age Pension Systems: A Theoretical Evaluation.” In H. Giersch (ed.), Reforming the Welfare State. Berlin, Heidelberg and New York: Springer, pp. 233-246.
Homburg, S. (1999). “Compulsory Savings in the Welfare State.” Mimeo, University of Hannover, forthcoming in Journal of Public Economics.
Homburg, S., and W. Richter. (1990). “Eine effizienzorienierte Reform der GRV.” In B. Felderer (ed.), Bevölkerung und Wirtschaft. Berlin: Duncker und Humblot.
Konrad, K. A., T. E. Olsen, and R. Schöb. (1994). “Resource Extraction and the Threat of Possible Expropriation: The Role of Swiss Bank Accounts.” Journal of Environmental Economics and Management 26, 149-162.
Kotlikoff, L. (1996). “Simulating the Privatization of Social Security in General Equilibrium.” NBER Working Paper 5776.
Kotlikoff, L., K. Smetters, and J. Walliser. (1998). “The Impact of Transiting to Privatized Social Security.” In H. Siebert (ed.), Redesigning Social Security. Mohr Siebeck: Tübingen.
Lüdeke, R. (1988). “Staatsverschuldung, intergenerative Redistribution und umlagefinanzierte gesetzliche Rentenversicherung: Eine andere Sicht der Lasten durch ein negatives Bevölkerungswachstum.” In J. Klaus and P. Klemmer (eds.), Wirtschaftliche Strukturprobleme und soziale Fragen. Berlin: Duncker und Humblot.
Marglin, S. A. (1963). “The Social Rate of Discount and the Optimal Rate of Investment.” Quarterly Journal of Economics 77, 95-111.
Meade Committee. (1978). The Structure and Reform of Direct Taxation. Report of a Committee chaired by Professor J. E. Meade (The Institute for Fiscal Studies). London: Allen & Unwin.
Niehans, J. (1966). “Eine vernachlässigte Beziehung zwischen Bodenpreis, Wirtschaftswachstum und Kapitalzins.” Schweizerische Zeitschrift für Volkswirtschaftslehre und Statistik 102, 195-200.
Nugent, J. (1985). “The Old-age Security Motive for Fertility.” Population and Development Review 11, 75-97.
OECD. (1988). Reforming Public Pensions. OECD Social Policy Studies No. 5.
OECD. (1996). Education at a Glance. Paris: OECD.
Romer, P. (1990). “Endogenous Technological Change.” Journal of Political Economy 98, S71-S102.
Schneider, F., and D. Enste. (2000). “Shadow Economies around the World-Size, Causes, and Consequences.” Journal of Economic Literature, forthcoming.
Sen, A. K. (1967). “Isolation, Assurance and the Social Rate of Discount.” Quarterly Journal of Economics 81, 112-124.
Siebert, H. (1998). “Pay-as-You-Go versus Capital-Funded Pension Systems: The Issues.” In H. Siebert (ed.), Redesigning Social Security. Mohr Siebeck: Tübingen.
Sinn, H.-W. (1980). “Besteuerung, Wachstum und Ressourcenabbau. Ein allgemeiner Gleichgewichtsansatz.” In H. Siebert (ed.), Erschöpfbare Ressourcen. Berlin: Duncker und Humblot. English translation: “Taxation, Growth and Resource Extraction. A General Equilibrium Approach.” European Economic Review 19, 1982, 357-386.
Sinn, H.-W. (1985). Capital Income Taxation and Resource Allocation. Amsterdam, New York etc.: North-Holland.
Sinn, H.-W. (1997). “The Value of Children and Immigrants in a Pay-as-you-go Pension System: A Proposal for a Partial Transition to a Funded System.” NBER Working Paper 6229.
Sinn, H.-W. (1998a). “Comment on Axel Börsch-Supan.” In H. Siebert (ed.), Redesigning Social Security. Mohr Siebeck: Tübingen.
Sinn, H.-W. (1998b). “The Pay-as-you-go Pension System as a Fertility Insurance and Enforcement Device.” NBER Working Paper 6610.
Sinn, H.-W. (1999). “Die Krise der Gesetzlichen Rentenversicherung und Wege zu ihrer Lösung.” In Bayerische Akademie der Wissenschaften (ed.), Jahrbuch 1998. München: Beck, pp. 95-119.
Thum, M., and J. von Weizsäcker. (1999). “Implizite Einkommensteuer als Meßlatte für die aktuellen Rentenreformvorschläge.” Ifo Discussion Paper 64, Ifo Institute, Munich.
Wissenschaftlicher Beirat beim Bundesministerium fürWirtschaft. (1998). Grundlegende Reform der gesetzlichen Rentenversicherung. Bundesministerium für Wirtschaft, Studienreihe No. 99: Bonn.
Werding, M. (1997). “Pay-As-You-Go Public Pension Schemes and Endogenous Fertility.” Mimeo, Department of Economics, University of Passau.
Werding, M. (1998). Zur Rekonstruktion des Generationenvertrages. Mohr Siebeck: Tübingen.
Werding, M. (1999). “Umlagefinanzierung als Humankapitaldeckung.” Jahrbücher für Nationalökonomie und Statistik 218, 491-511.
Wrede, M. (1999). “Pareto Efficient Pay-As-You-Go Pension Systems with Multi-Period Lives.” Jahrbücher für Nationalökonomie und Statistik 219, 494-503.
Rights and permissions
About this article
Cite this article
Sinn, HW. Why a Funded Pension System is Needed and Why It is Not Needed. International Tax and Public Finance 7, 389–410 (2000). https://doi.org/10.1023/A:1008760717038
Issue Date:
DOI: https://doi.org/10.1023/A:1008760717038