The Case for an Unfunded Pay as You Go Pension

Abstract

Abstract Chapter 3—‘The Case for an Unfunded Pay as You Go Pension’—asks whether an unfunded pay as you go (PAYG) approach might provide a solution to the problems with funded collective pension schemes discussed in the previous two chapters. With PAYG, money is directly transferred from those who are currently working to pay the pensions of those who are currently retired. Rather than drawing from a pension fund consisting of a portfolio of financial assets, these pensions are paid out of the state Treasury’s coffers. The chapter explores the extent to which a PAYG pension can be justified as a form of indirect reciprocity that cascades down generations. It considers the claim that a PAYG arrangement in which each generation pays the pensions of the previous generation can be justified as in mutually advantageous strategic equilibrium. It makes the case that reciprocity can be realized by a notionally funded PAYG scheme, of which the UK Teachers’ Pension Scheme provides an example. The chapter concludes with the observation that all three of the approaches considered across Chapters 1–3—collective defined contribution (CDC), defined benefit (DB), and PAYG—converge on a similar form of collective pension provision, which breaks open the silos of individual DC pension pots while avoiding the high expense of funding that is pegged to bond yields. Whether it ultimately takes the form of a notionally funded PAYG DB scheme, a genuinely funded DB scheme, or CDC, we should adopt a collective, multigenerational, society-wide form of pension provision.