The demographics of unfunded pensions

The performance of pay-as-you-go old-age insurance under different demographic conditions can be estimated from a metric consisting of the implicit rate of return to successive cohorts. We show a positive return for the prospective population over the next few years, but for cohorts born after the end of the century returns will become sharply negative. A decline in returns is typical of pay-as-you-go schemes as they mature, and a change to negative returns is typical in particular as the birth rate falls under fixed economic conditions. The return can be kept positive by greatly increased fertility or immigration. Taking labour-force participation rates into account, and supposing entitlement independent of contribution, gives much larger negative rates of return, however. The main calculations considered here are for schemes with a constant pension. If the contribution rather than the pension is kept constant then the disparities between cohorts with respect to their returns are smaller, and although the negative returns for future generations then set in earlier they are smaller. The conclusions of the paper are broadly applicable to any population that showed a baby boom after World War II and replacement-level or lower fertility subsequently.