Aging, myopia, and the pay-as-you-go public pension systems of the G7: A bright future?

Abstract

Public pension systems of the G7 countries were established in an era when contributors far outnumbered beneficiaries. Now, for each beneficiary there are fewer contributors, and this trend is projected to accelerate. To evaluate the prospects for these economies we develop an endogenous growth overlapping generations model. We analyze individuals' behavior when their expectations regarding longevity are rational or myopic, and examine whether policies exist that can offset any adverse effects of aging. We find that while perfectly anticipated aging is welfare improving, myopia worsens welfare, puts pension systems at risk, and cannot be easily remedied by public policy. © 2005 Blackwell Publishing, Inc.