Smoothing the Implicit Tax Rate in a Pay-as-you-go Pension System

In this paper, we analyze how the implicit tax rate can be smoothed in a pay-as-you-go system if life expectancy increases or if the rate of population growth declines. We show that generation-specific contribution or replacement rates are necessary to smooth the implicit tax rate. Partial funding of the pension system is indispensable if the rate of population growth falls. If life expectancy increases, the contribution rate fluctuates and may not converge to a new steady state value unless funded elements are introduced.