Abstract
The broadly used pay-as-you-go (PAYG) pension system is intrinsically wrong. The essence of the problem is that the PAYG system distributes the yield of raising children, i.e., of human capital investment (which is essentially the pension contribution), in such a way that it disregards the extent to which individuals have contributed to this, and even whether it has occurred at all. This error can be corrected if we take the pension contribution to be the yield on an investment of human capital, and as such use this to pay back the costs and expenses of the raising of the contribution payer—overall to those who paid these costs and expenses at the time. Accordingly, the central question of my study is whether it is possible to construct a consistent pension system based on the above foundations, and how my ideas may be inserted into the Diamond–Samuelson model. The method of the study was logical analysis and the construction of a theoretical mathematical model. The results of the study show that it is possible to construct a public pension system that operates according to a different logic than today’s system, a system which is free from the effects of demographic fluctuations, which does not motivate the refusal to have children, and which will remain self-sufficient under all circumstances. The study achieves this by presenting a possible pension system of this kind in detail. Via the suitable modification of the Diamond–Samuelson model, I have succeeded in showing that the pension system I am proposing increases the willingness to have children up to the social optimum, in contrast to the fully (but traditionally) funded and PAYG systems. This system currently only exists in theory and may be regarded as a major theoretical innovation, which naturally has certain (although not particularly extensive) antecedents. Its introduction could enable the resolution of the contradictions of existing pension systems and could also provide a solution to the as yet unsolved problem of the increasingly expensive regeneration of human capital, and as such, its potential practical implications are immeasurable.
Highlights
The most popular pension system worldwide today is the non-funded, pay-as-you-go (PAYG) pension system, created in an ad-hoc manner by Roosevelt
The “official ideology” of this system was provided by Samuelson (1958) almost two decades after its introduction, greatly reassuring its operators, who until had thought they were running a Ponzi scheme (Blackburn 2003) and felt that Samuelson had shown this was not the case ( a article in The Economist (2017) praised Samuelson as the inventor of a “good” Ponzi scheme.) According to Samuelson, the members of different generations had signed a social contract according to which current active workers maintain the current older generation, in exchange for which they can count on future active workers to maintain them when they get old
I have demonstrated the errors of the PAYG system, and the principles according to which an human capital (HC) system should be constructed, in several studies (Banyár 2016a, 2017, 2019a, 2019b, 2019c)
Summary
The most popular pension system worldwide today is the non-funded, pay-as-you-go (PAYG) pension system, created in an ad-hoc manner by Roosevelt. I regard contribution payment as the return on the initial investment of human capital, which children are obliged to (re)pay, but which does not make them eligible to receive a pension. The thoughts presented here differ from the proposals for linking the pension system to the raising of children put forward by practically all other authors with respect to the fact that they regard the goal of such a system to be to encourage an increase. The basis of the pension is the contribution payment capacity of the new generation, but this has not been built into the system, meaning the level of individual pensions is not dependent on this. Has a subsystem that is funded (traditionally, not with human capital), but the size of this changes on an individual basis, depending on the number of children. The pensions received from the funded and PAYG systems are paid consecutively in the manner explained previously
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