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Harvard professor says funded systems beat PAYG

GLOBAL – Harvard professor David Bloom says the funded pension systems in Chile, Singapore and Malaysia are superior to the pay-as-you-go systems in Europe, the US and Japan.

“In a sense they are immune to the huge demographic swings we get,” said Bloom, who is Professor of Economics and Demography at the university’s Department of Population and International Health.

“The problem is, we are kind of locked into bad systems in some countries,” he told a meeting on the pensions crisis at the World Economic Forum in Davos, Switzerland.

“You can start a pay-as-you-go system in any country today by just asking people who are working to pay for the retirees. But with a fully funded system you can’t. You need time for the fund basically to accumulate so people can draw it down.”

Bloom said the major problem is in how to organize the transition from PAYG to a fully funded system. “This is the problem we haven’t really cracked yet,” he said.

“I think that’s what to figure out. How to make that transition in a way that is economically and financially responsible and politically feasible? I think it_is on this we have to focus attention but I haven’t seen it yet.”

Elsewhere, Adair Turner, the chairman of the UK’s pension commission, told the meeting that any technical solutions to the pensions crisis “must be based on the underlying demography”.

Turner said demographic ageing and an increase in the dependency ratio would lead to at least one of four outcomes: pensioners would be poorer, retirement ages would be higher, taxes would go up, or the working population would have to raise its savings rate in present and future generations.

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