C
CLK
Member
I've come across the following "proof" that PAYG constitutes debt financing:
"Consider the following two strategies for a state implementing a national pension system:
This seems elaborate.
If you assume that there is no pension obligation in respect of existing retirees and that a national pension system is intended to be set up for the working population, then the possible financing approaches are broadly:
The extract in italics, above, seems so specifically constructed.
Could someone please let me know if there is understanding that I have failed to pick up on?
"Consider the following two strategies for a state implementing a national pension system:
A) Collect contributions from current workers and use them to pay pensions of current retirees;
Promise that future retirees' pensions will be secured by the contributions of future workers; and
Borrow money on capital markets to fund public projects which earn a public return that can finance tax revenue to repay the debt.
B) Collect contributions from current workers and set them aside to pay the pensions of the workers who made the contributions; and
Borrow money on capital markets and use this money to pay the pensions of current retirees.
The two financing methods are equivalent. Therefore the conclusion must be that PAYG is a form of borrowing from future generations to pay the pensions of current generations."Promise that future retirees' pensions will be secured by the contributions of future workers; and
Borrow money on capital markets to fund public projects which earn a public return that can finance tax revenue to repay the debt.
B) Collect contributions from current workers and set them aside to pay the pensions of the workers who made the contributions; and
Borrow money on capital markets and use this money to pay the pensions of current retirees.
This seems elaborate.
If you assume that there is no pension obligation in respect of existing retirees and that a national pension system is intended to be set up for the working population, then the possible financing approaches are broadly:
1) Working population contributes and the contributions are set aside to pay their pensions in retirement;
2) No contributions are made by the working population and pensions in respect of the current workers are paid for by contributions from future generations;
3) Although probably not practical, borrow money and invest to pay the pensions of the current workers when they retire.
The existence of a "promise" that the pensions of current workers will be paid for by the contributions of future generations essentially defines PAYG as a form of debt financing.2) No contributions are made by the working population and pensions in respect of the current workers are paid for by contributions from future generations;
3) Although probably not practical, borrow money and invest to pay the pensions of the current workers when they retire.
The extract in italics, above, seems so specifically constructed.
Could someone please let me know if there is understanding that I have failed to pick up on?