In PAYGO schemes, based on the principle of intergenerational solidarity (today’s workers pay benefits to today’s retirees in the hope that their children will pay their benefits tomorrow), the rate of return is by definition equal to the growth rate of the economy: the contributions available to pay tomorrow’s retirees will rise as average wages rise. In theory, this also implies that today’s active workers have an interest in ensuring that average wages rise as rapidly as possible. They should therefore invest in schools and universities for their children and promote a higher birth rate. In
...more
