Pay-as-you-go pension systems supported by the old rich

Abstract

In this paper, we present a pension policy that supplements the pay-as-you-go pension system with payments by old generations with a high assets income. This supplement is intended to reduce intergenerational inequity. To analyze the effect of this pension policy on both capital stock in the economy and the utilities of the rich and the poor, we build an Over-Lapping Generations model with different incomes when young. This model finds that the stable steady-state capital stock level increases as the old rich generation contributes to the pension system. We also find by numerical simulations that there is a Pareto efficient premium level between high-income and low-income people.