pay-as-you-go pension

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A pension scheme where the pensions of the retired are paid from current contributions. A pay-as-you-go pension scheme involves a direct transfer from the working to the retired. The pension scheme does not own any assets and the flow of funds into the scheme must match the flow of funds out. In contrast, with a fully-funded pension scheme current pensions are paid out of a fund accumulated from the contributions made by the retired during their working lives or by their employers. If a country starts from a pay-as-you-go pension scheme, changing over to a funded scheme is difficult, since those whose working lives fall in the transition period will have to pay twice over, once to pay the pensions of the previous generation and again to build up a fund to pay their own pensions.

Subjects: Economics.

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