BISMARCKIAN AND BEVERDGEAN PAY-AS-YOUGOPENSION SCHEMES WHERE THE FINANCIALSECTOR IS IMPERFECTLY COMPETITIVE

A switch from a Bismarckian (BIS) earnings-related to a Beveridgean (BEV) flat ratepay-as-you-go (PAYG) pension scheme will raise the variance of personal replacementratios and, hence, the variance of individual interest-saving elasticities. A monopolisticfinancial sector can then make greater profits through an increased scope for pricediscriminationbetween household savers and borrowers. A proportion of householdsmay opt out of participating with the financial sector, while savers receive a lower rate ofreturn. Provided the growth rate is similar under both regimes, BIS-PAYG may emergeas the democratic outcome, if the median voter saves a significant amount, and BEVPAYG,if the median voter saves little or nothing and receives an ordinary allocation ofreturned profits. The actual outcome depends both on the model specification, howprofits are returned and on the underlying income distribution.