On the split of social security contributions between funded and pay-as-You-Go pension schemes; Contribution to growth

Abstract

Growth is sought in the economy of every country. At the same time in most of the cases, a reduction or in the best case a containment of the fiscal expenditures is envisioned. When the combination of the two is achieved, deficit as a percentage of GDP is achieved. Pensions have been in the spotlight with regards to their contribution to the total expenditure of a country, since pension benefits paid are treated as fiscal expenditure. Its ratio to GDP is a measure of the sustainability of the pension system. As a consequence, in the midst of a distressed economic environment, combined with a decreasing working population the social security system of a country can be under severe pressure. This pressure becomes stronger when it is combined with a reduction of GDP and increased unemployment. The latter, along with the aging population, has also contributed to the creation of a deficit in pension funds. The policies followed by the administrations of the countries do not always resolve the aforementioned issues. Consequently, the pay-as-you-go systems were brought in a difficult position, especially as the employee contributions did not suffice to finance the increasing number of retirees, creating the need of the financing of pension schemes from other sources. One potential route away from this difficult situation is the partial shift of pay-as-you-go to funded pension schemes. This approach has two benefits for the state; on one hand allows for the reduction of the financing that the state provides and on the other hand fosters the investment of the contributions to the funded schemes in the real economy, which in its turn has a clear contribution to the growth of the country. One country of interest, exhibiting the characteristics discussed above is Greece. This chapter attempts to investigate the contribution of funded pension schemes to the growth of a country with the use of econometric models. Funded pension schemes are long-term investors that can steer their investments to provide funding to enterprises, especially the small and medium ones. This can take place through vehicles such as ETFs and VC, which facilitate the flow of funds to the enterprises that need them, thus contributing further to the growth of the economy.