SFB 303 Discussion Paper No. A - 548
Author: Marquardt, Marko, and Wolfgang Peters
Title: Collective Madness
Abstract: This paper analyzes the influence of demographic changes on
pay-as-you-go (PAYG) pension systems under majority voting. Ageing of
the population, either through a decrease in the birth rate or through
increasing life expectancy, leads to a lower internal rate of return of
PAYG systems. Consequently, individuals prefer less PAYG pensions as
population ages. However, empirical studies show that the extent of
PAYG systems is increasing while the population is ageing, which
seemingly contradicts the described individual rationale. We solve
this puzzle by introducing majority voting on the extent of the PAYG
pension system. Demographic change is shown to affect not only the
individual's rationale, but also the composition of the electorate. In
particular, the decisive voter may desire more intergenerational
redistribution in a society with lower birth rates and higher
longevity. This effect results in what we call collective madness:
although each individual prefers a reduction of the PAYG system as the
population ages, society as a whole pleads for its extension.
Keywords: Public Pension, Ageing, Majority Voting
JEL-Classification-Number: H55, D72, J18
Creation-Date: April 1997
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