Intergenerational Conflicts

To sum up, in an aging society, any reforms of a pay-as-you-go system produce intergenerational conflicts. With a move to a funded system, generation 3 loses simply because it suffers from “double burdens,” which means that it saves both for itself and its parents in generation 2. If generation 3 does not save for its parents, its net benefit becomes zero through the transition to a funded system, which is better than a negative net benefit. But, in this situation, generation 2 loses out.

A plausible and realistic pension reform is that the pension benefit of generation 2 is partially cut. At the same time, the burden of caring for generation 2 is transferred in part to future generations and is not levied solely on generation 3. Namely, the government could issue public debt to finance part of the benefits of generation 2 and redeem the debt gradually over a long period. In order to achieve this, generations that follow generation 3 can also take care of generation 2 to some extent without feeling too great a burden. Alternatively, it is desirable to reduce the benefits of generation 2 in period 2 to a significant extent. By doing so, the burden on generation 3 is reduced. If generation 2 is relatively rich compared with generations 3, 4, and 5, this option is reasonable.

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