Ageing and the Pay-as-you-go (PAYG) Pension System’s Asset-liability (Mis)Matching

The study present how in the late 1930s-1940s a new, modern pension system was introduced in America without any theoretical basis, as a kind of arbitrary mix of existing pension systems, to replace the by then non-functioning “traditional pension system” in which working children maintained their ageing parents in exchange for having been raised. Later, in 1958, they found an ideology for the system, “solidarity between generations,” but this didn’t fit in with the system’s economic foundations, with the fact that the modern, pay-as-you-go pension system distributes the profits of raising children amongst the older generation regardless of how much people have contributed to it. This made raising children unprofitable, which provided a strong incentive to avoid it, thus launching the ageing process. Moreover, the modern pension system, also as a result of ageing, is making increasingly large and uncovered promises to the retired generation. The system may be repaired by matching the asset side to the liabilities side, for example, by only promising a pension to those who have contributed to the system, and only to the extent of that contribution. Contribution payments are an obligation, the repayment of the cost of people’s upbringing, with relation to which no pension is automatically due. By doing so, the 3rd pillar of the modern pension system will also have been capitalized using a special kind of capital: human capital.