The Case for Pay-as-You-Go Pensions in a Service Economy
Bas Van Groezen
Tilburg University; Tilburg University - Center for Economic Research (CentER)
A. C. Meijdam
Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics
Harrie A. A. Verbon
Tilburg University - CentER; CESifo (Center for Economic Studies and Ifo Institute)
Scottish Journal of Political Economy, Vol. 54, No. 2, pp. 151-165, May 2007
The elderly consume more labour-intensive services than young individuals. This makes them vulnerable to rising costs of services due to higher wages, which can be caused by increased capital accumulation. This paper shows that in a model with a service sector, the golden-rule capital stock is lower and dynamic inefficiency is more likely to occur than in the conventional one-sector model. This implies that in many cases, a positive Pay-As-You-Go tax maximises long-run welfare in a service economy. Calculations based on data from the United Kingdom and the Netherlands show that the long-run optimal degree of funding coincides with the current situation in these countries.
Number of Pages in PDF File: 15Accepted Paper Series
Date posted: May 2, 2007
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