Demographic comparisons between the pension burdens of pay-you-go and funded systems

Fertility declines to below-replacement level is a common trend; and it will cause dramatic increases in the pension burdens of pay-you-go systems, in which the workers pay the benefits of retirees in the same periods. Funded pension systems transfer cohorts’ saving to consumption, and hence their pension burdens are invariant to fertility change. Comparing the difference between the pension burdens of the two systems in certain periods could provide relevant information to the decision on whether or not to establish funded pension systems to cope with population aging. The main obstacle in doing such a comparison is that, the burden of a pay-you-go system refers to certain periods, while that of a funded system accounts for life cycles. To overcome the obstacle, a time-referred cohort old-dependence ratio is proposed in this paper, which is comparable to the period old-dependence ratio at a certain time, purely demographic, and could be computed for all the countries and areas of the world under desire assumptions. Examples are given using data from China, Italy, Japan and Republic of Korea.