The case for an unfunded pay as you go (PAYG) pension

The previous two lectures grappled with various challenges that funded collective pension schemes face. In the final lecture, I ask whether an unfunded ‘pay as you go’ (PAYG) approach might provide a solution. With PAYG, money is directly transferred from those who are currently working to pay the pensions of those who are currently retired. Rather than drawing from a pension fund consisting of a portfolio of financial assets, these pensions are paid out of the Treasury’s coffers. The pension one is entitled to in retirement is often, however, a function of, even though not funded by, the pensions contributions one has made during one’s working life. I explore the extent to which a PAYG pension can be justified as a form of indirect reciprocity that cascades down generations. This contrasts with a redistributive concern to mitigate the inequality between those who are young, healthy, able-bodied, and productive and those who are elderly, infirm, and out of work. I explore claims inspired by Ken Binmore and Joseph Heath that PAYG pensions in which each generation pays the pensions of the previous generation can be justified as in mutually advantageous Nash equilibrium. I also discuss the relevance to the case for PAYG of Thomas Piketty’s claim that r > g, where “r” is the rate of return on capital and “g” is the rate of growth of the economy.