Can and should a pay - as - you - go pension system mimic a funded system ? ∗

This paper considers the possibility of letting a pay-go pension system mimic a fully funded pension system. Generically, it turns out to be impossible to make a less than fully funded pension system actuarially fair on average. But a non-funded pay-go pension system can provide an actuarially fair implicit return on the margin, which increases economic efficiency. The benefits of this fall entirely on current pensioners as a windfall gain unless compensating transfers are implemented. Such a system can be thought of as a pay-go system that mimics a fully funded pension system in combination with lump transfers to current pensioners from current and future workers. ∗ We are grateful to Avinash Dixit and Hans-Werner Sinn for very useful comments and to Judy Petersen, who copyedited a draft of this paper. ‡ Assar Lindbeck is also a fellow at IUI, Stockholm. Address of authors: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden. Telephone: +46-8-162070, Fax: +46-8-161443, Email: [email protected] and [email protected]; homepages: http:/www.iies.su.se/