This chapter investigates dynamic implications of pension contributions and intergenerational transfers under modified funded systems. By incorporating interest groups' contributions to social security funds into the conventional overlapping generations model, the model explores the long-term effects of public spending, social security fund, and economic growth. Good economic conditions will not necessarily lead to high growth of pension funds. The pension fund is too little in terms of static efficiency (or compared with private consumption) but may be too much or too little in terms of the dynamic efficiency (or as the steady state level). We finally examine the normative role of taxes (and subsidies) on consumption and pension contributions.
There has been much interest in the long-term macroeconomic and intergenerational redistribution effects of public pension reform. It is well recognized that pay-as-you-go systems are not attractive when the rate of economic growth declines. However, the change from pay-as-you-go financing to full funding is hard in terms of intergenerational equity, just as reducing the public debt-GDP ratio is hard. Researchers have investigated mechanisms under which a decentralized economy might successfully change from a public pay-as-you-go pension scheme to a private fully funded one. There have been several important attempts to investigate such pension reform. The standard analysis is by simulation studies using overlapping generation models based on Auerbach and Kotlikoff (1987). Recently, Cifuentes and Valdes-Prieto (1997) among others offer the output from a simulation model that describes the transition in detail, year by year. Mulligan and Sala-i-Martin (1999a, b) present a useful survey of various theories of social security. (See Hatta and Oguchi (1999) for the simulation study on Japanese pension reforms.)
Because most of the social security tax revenue from current workers