How much of an internal rate of return would a sustainable pay-as-you-go pension system offer current and future generations equally? The answer is the sum of the Long-Run Biological Interest Rates (LBIR), the real-world equivalent of Samuelson’s (1958) biological interest rate, and future productivity growth. Reflecting global population ageing, the median LBIR across 172 countries is as low as 1 percent per year. The LBIRs are particularly low in advanced countries, estimated to be negative in many of them, and require ample financial reserves today or future productivity growth to maintain participation in pension schemes. On the other hand, the LBIRs in less developed regions, such as in sub-Saharan Africa, are relatively high, indicating a potential to use a pay-as-you-go scheme to expand the coverage of public pensions. Raising the retirement age by five years brings up the LBIR by 40 basis points, significantly improving the long-run budget constraint of a pension scheme.

Recently, policy debate and comparative research on old-age pensions have focused on the financial sustainability of pension systems in the face of demographic change. This study, however, also takes into account distributional effects involved in pension system structures. Theoretical, institutional and empirical analyses are combined to form a comprehensive framework for evaluating financial sustainability and distributional effects of the pension systems implemented in Germany and the United Kingdom. Along with projections of demographic trends and future public pension expenditure, the empirical results on old-age incomes and their distribution allow for identifying a number of reform options for each pension system to improve their financial or distributional results.

"In this paper the authors reconsider the idea of an earnings-related pension system with reserves invested in indexed government bonds as a mechanism to both ensure financial sustainability and improve security. They start by reviewing the characterization of the sustainable rate of return of an earnings-related pension system with pay-as-you-go financing. The authors show that current proxies for the sustainable rate, including the Swedish "gyroscope," are not stable and propose an alternative measure that depends on the growth of the buffer-stock and the pay-as-you-go asset. Using a simple one-sector macroeconomic model that embeds a notional account pension system they then show how GDP indexed government bonds, if combined with the right measure for the sustainable rate of return on contributions, could be used to generate a sustainable and secure earnings-related pension system, without becoming a fiscal burden. The proposal is particularly attractive for countries considering reforms to earnings-related systems that have accumulated a large implicit pension debt. In this case, the government bonds allow the financing of this debt in a transparent way. The proposed mechanism can also facilitate the transition to a fully-funded pension system when the government bonds are allowed to be traded. "--World Bank web site.

Describes factors that will lead to the collapse of Medicare and gives recommendations for preserving the program's future. Examines major problems of financing, Congress' penchant for expanding the scope of Medicare without committing additional revenues, and the growing elderly population. Recommends trashing the current generational transfer method of financing in favor of a system that requires each age cohort to insure itself against retirement medical expenses. Rettenmaier is research scientist, and Saving is director, at the Private Enterprise Research Center at Texas AandM University. Annotation copyrighted by Book News, Inc., Portland, OR