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A What are the main differences between a pay-as-you-go (PAYG) pension system and capital-funded pension system?...

A What are the main differences between a pay-as-you-go (PAYG) pension system and capital-funded pension system?

B What is the major problem of a PAYG system? Please explain it in a few sentences and the formula above.

C What is a major problem of capital funded pension systems?   

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Expert Solution

Answer a) Both are the basic terms of old age pension. Pay as you go is the system in contribution in one year is shifted in benefits of recipient in same period. Under this system , no actual capital is accumulated. British National insurance system is PAYG system.

While in capital funded pension system claim for benefits are included by capital stock with the past contribution. After the retirement , to old person benefits are paid from the interest which accrued on the capital stock.

Answer- B) Problem of Pay as you go system- Major problem of PAYG is that in this decisions about plan are under the control of political influence. This system needs adjustment for economic uncertainity , but adjustments are made on the voluntary basis of legislation. As well as pay as you go system do not provide number of options for the benefits of old age people.

Rahul Sunny answered 2 years ago
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