The Case for Pay-as-You-Go Pensions in a Service Economy

15 Pages Posted: 2 May 2007  

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)

Abstract

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.

Suggested Citation

van Groezen, Bas and Meijdam, A. C. and Verbon, Harrie A. A., The Case for Pay-as-You-Go Pensions in a Service Economy. Scottish Journal of Political Economy, Vol. 54, No. 2, pp. 151-165, May 2007. Available at SSRN: https://ssrn.com/abstract=980138 or http://dx.doi.org/10.1111/j.1467-9485.2007.00409.x

Bas J.A.M. Van Groezen (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

A.C. (Lex) Meijdam

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 23 85 (Phone)
+31 13 466 30 42 (Fax)

Harrie A. A. Verbon

Tilburg University - CentER ( email )

Department of Economics
P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 466 28 78 (Phone)
+31 13 466 30 42 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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