Macroeconomic Consequences of Pay-as-you-go Public Pension System

Abstract

We analyze macroeconomic consequences of pay-as-you-go (PAYGO) public pension system with a simple overlapping generations model. Contrary to large body of existing literatures offering quantitative results based on simulation study, we take another route by adopting a highly simplified framework in search of qualitatively tractable analytical results. The main contribution of our results lies in providing a sound theoretical foundation that can be utilized in interpreting various quantitative results offered by simulation studies of large scale general equilibrium models. We present a simple overlapping generations model with a defined benefit(DB) PAYGO public pension system as a benchmark case and derive an analytical equilibrium solution utilizing graphical illustration. We also discuss the modifications of the benchmark model required to encompass a defined contribution(DC) public pension system into the basic framework. Comparative statics analysis provides three important implications; First, introduction and expansion of the PAYGO public pension, DB or DC, result in lower level of capital accumulation and higher expected rate of return on the risky asset. Second, it is shown that the progress of population aging is accompanied by lower capital stock due to decrease in both demand and supply of risky asset. Moreover, risk premium for risky asset increases(decreases) as the speed of population aging accelerates(decelerates) so that the possibility of so-called "the great meltdown" of asset market cannot be excluded although the odds are not high. Third, it is most likely that the switch from DB PAYGO to DC PAYGO would result in lower capital stock and higher expected return on the risky asset mainly due to the fact that the young generation regards DC PAYGO pension as another risky asset competing against the risky asset traded in the market. This theoretical prediction coincides with one of the firmly established propositions in empirical literature that the currently dominant form of public pension system has the tendency to crowd out private capital accumulation. 본 연구는 간단한 일반균형 중첩세대모 형을 사용하여 공적연금의 거시경제적 영 향에 대한 정성적(qualitative) 분석 결과 를 제시하는 것을 목적으로 한다. 이는 분 석적인(analytical) 방법으로 균형을 찾고 그 성질을 탐구하는 것이 불가능하여 다 양한 형태의 수치 분석적 기법을 동원하 는 기존 선행연구들이 제시하고 있는 정 량적(quantitative) 분석의 결과를 이론적 으로 해석할 수 있는 기제를 마련한다는 차원에서 의미를 가지는 것으로 평가된다. 본 연구는 우선 논의의 단순화를 위해 확 정급여(def ined benef i t )형 부과방식 (pay-as-you-go) 공적연금체제하의