The DB System

In the DB system, the pension benefit is fixed, while pension contributions are endogenously determined. Suppose в = 10 without loss of generality. Further assume that a pay-as-you-go pension is introduced in time 2 when generation 1 is old. Then, the net benefit of each generation in the DB case is given as Table 7.4. Alternatively, we have

Generation 1 does not pay any contribution in time 1, but receives a benefit of 10 in time 2 when the pension is introduced. Thus, the net benefit is 10. Generation 2 pays 10 and receives 10, so that its net benefit is 0. Generation 3 baby boomers contribute 5, but receive 10 in benefits. Thus, their net benefit is 5. Generation 4 pays 20 but receives 10; consequently, its net benefit is —10. The same applies to generation 5. Because the baby boomer population is larger than generation 2 (its parents), its contribution is the smallest among the six generations. This benefits the baby boomer generation. Generations 4 and 5 lose out because the population declines.

< Prev   CONTENTS   Source   Next >