- New Directions in Modern Economics series
Edited by John Grahl
Chapter 13: Protection of the Elderly Against the Risks of Capital Markets: The Advantages of Public PAYGO Pension Systems
Jörg Huffschmid PRINCIPLES UNDER PRESSURE 13.1 It has been one of the major historic achievements of the European welfare states that they regard – notwithstanding their many differences – a decent living for the elderly as a public good and a matter of social responsibility, which can be complemented and enhanced but not replaced by individual responsibility. People who have worked for decades should be entitled not only to be protected from old age poverty but to roughly maintain their living standards during their period of retirement. For the large majority of EU member countries this responsibility has led to mandatory public Pay-As-You-Go-systems (PAYGO), which represented 83.5 per cent of all pension payouts in the EU at the end of the 1990s.1 These systems reflect an intergenerational contract through which the working population pays – via taxes or contributions on their incomes – the pensions for the retired part of the population. The pension of the now active population will in turn be paid by the following generation and so on. In such a system of direct and immediate transfer of money from one part to another part of the population, financial markets do not play a relevant role (except as a medium for this transfer or for short-term cash management). Even in countries where large parts of the pension systems were organized via collective pension funds and individual savings and are therefore dependent on performing financial markets – the UK, Sweden and the Netherlands – they were regulated in a way which made them...
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