Answer Happy

Question 1 Consider the model of overlapping generations of young and old that was used to analyse pension systems in the lectures. Assume a pay-as-you-go pension system is in existence with contributions t paid by the young and pensions b paid to the old, which satisfy the balanced-budget requirement b = (1 + n)t, where n is the population growth rate. Now suppose that the population growth rate n falls, but remains above the real interest rater. Two options for reforming the pay-as-you-go pension system are: (1) maintaining contributions t and cut- ting pensions b; or (ii) increasing contributions t and maintaining pensions b. Compare the effects of these two reforms on the current old and young generations. Is it possible to say which reform is preferable? [6 marks)