Public Debt and the Public Pension

The Funded System and Public Debt Issuance Within the Same Generation

The public pension and public debt have similar ways of conducting intergenerational redistribution. In this section, let us compare both policies. First, we assume public debt within the same generation, which has the same effect as a funded system. For simplicity, government spending is fixed throughout the analysis.

Public debt issuance implies Ricardian debt neutrality, as explained in Chap. 4. Similarly, a funded pension does not have the effect of intergenerational redistribution, as explained in Sect. 2 of this chapter. Changes in pension contributions b do not affect private consumption or welfare in either case. Thus, from the economic viewpoint, the two policies are equivalent.

Consider a two-period model of period t and period t + 1. With regard to a funded pension policy, the government budget is in surplus in period t, the first period, since pension contributions are invested. However, a deficit occurs in period t + 1, the second period, because of the payment of pension benefits.

With regard to public debt issuance, in period t the government budget is in deficit and in period t + 1 it is in surplus because of the raising of taxes for redemption.

Table 7.1 summarizes these outcomes. Although the two policies are economically the same, they are different with respect to the government budget balance. This suggests that information about a government deficit or surplus is not useful for judging the economic effect of public policy.

In the funded system, an increase in public contributions b reduces private saving s by the same amount, but the total macro saving does not change. With regard to public debt issuance within the same generation, the demand for public debt increases by the amount of tax reduction, but private saving s does not change. Since private saving s results in capital accumulation in the latter instance, the effect on capital accumulation is also the same between the two policies.

Table 7.1 The balance of the government budget (i)

Period t

Period t +1

Funded system



Bond issuance



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