Question

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

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

3.What is a major problem of capital funded pension systems?

Answer 1

Question 1.Pay as you go is a old age or retirement pension scheme. In this scheme the beneficiaries decides the amount they want to contribute. They can choose a particular amount to be deducted on regular intervals or pay up as lump sum. It doesn't guarantee how much money you will earn at retirement.No actual capital is accumulated in pay as you go system.

In capital funded pension system claim to beneficiary is included by capital stock and past contribution. They are oaid at retirement with the interest accrued on the capital stock.

Question 2.

The major problems of pay as you go pension scheme is that it is controlled by political influence. It creates a burden on future genaration as the older genaration ratio is increasing because of factors like life expectancy etc... the future generations contribution are paid to the old generation through this scheme.It creates a distortion in labour market.Rather it also , doesn't provide option for the benefits of old people.

Thanks.