The Outlines of a Possible Pension System Funded with Human Capital

Abstract

The broadly used pay-as-you-go (PAYG) pension system is intrinsically wrong. The essenceof the problem is that the PAYG system distributes the yield of raising children, i.e., of human capitalinvestment (which is essentially the pension contribution), in such a way that it disregards the extentto which individuals have contributed to this, and even whether it has occurred at all. This error canbe corrected if we take the pension contribution to be the yield on an investment of human capital, andas such use this to pay back the costs and expenses of the raising of the contribution payer—overallto those who paid these costs and expenses at the time. Accordingly, the central question of my studyis whether it is possible to construct a consistent pension system based on the above foundations, andhow my ideas may be inserted into the Diamond–Samuelson model. The method of the study waslogical analysis and the construction of a theoretical mathematical model. The results of the studyshow that it is possible to construct a public pension system that operates according to a differentlogic than today’s system, a system which is free from the effects of demographic fluctuations,which does not motivate the refusal to have children, and which will remain self-sufficient underall circumstances. The study achieves this by presenting a possible pension system of this kind indetail. Via the suitable modification of the Diamond–Samuelson model, I have succeeded in showingthat the pension system I am proposing increases the willingness to have children up to the socialoptimum, in contrast to the fully (but traditionally) funded and PAYG systems. This system currentlyonly exists in theory and may be regarded as a major theoretical innovation, which naturally hascertain (although not particularly extensive) antecedents. Its introduction could enable the resolutionof the contradictions of existing pension systems and could also provide a solution to the as yetunsolved problem of the increasingly expensive regeneration of human capital, and as such, itspotential practical implications are immeasurable.