Sustainability of a Pay‐As‐You‐Go Pension System in a Small Open Economy with Ageing, Human Capital and Endogenous Fertility

19 Pages Posted: 6 Jan 2016

See all articles by Peter J. Stauvermann

Peter J. Stauvermann

Changwon National University

Ronald R. Kumar

University of the South Pacific

Date Written: February 2016

Abstract

The aim of the article is to theoretically investigate if a pay‐as‐you‐go (PAYG) pension system is sustainable in the presence of a declining population and increasing longevity of the retired generation. For this purpose, we use an overlapping generation model with endogenous fertility, endogenous longevity and human capital accumulation in a small open economy. We find that pensions will always increase as long as it is beneficial for parents to invest in human capital. Furthermore, we get the result that the ratio between pension benefits and the consumption of the young generation will strive to a positive limit value, and that a pure PAYG pension system will not run into any solvency problem due to a decreasing fertility rate or ageing.

Keywords: longevity, fertility, human capital, economic growth

Suggested Citation

Stauvermann, Peter J. and Kumar, Ronald Ravinesh, Sustainability of a Pay‐As‐You‐Go Pension System in a Small Open Economy with Ageing, Human Capital and Endogenous Fertility (February 2016). Metroeconomica, Vol. 67, Issue 1, pp. 2-20, 2016, Available at SSRN: https://ssrn.com/abstract=2711522 or http://dx.doi.org/10.1111/meca.12083

Peter J. Stauvermann (Contact Author)

Changwon National University ( email )

Changwon
Korea, Republic of (South Korea)

Ronald Ravinesh Kumar

University of the South Pacific ( email )

Laucala Campus
Suva
Fiji

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