Why a funded pension system is needed and why it is not needed

Based on explicit present value calculations, the paper criticizes the view that the PAYGO system wastes economic resources. In present value terms, t here is nothing to be gained from a transition to a funded system even thou gh the latter offers a permanently higher rate of return. The sum of the im plicit and explicit tax burdens that result from the need to respect the ex isting pension claims is the same under all systems and transition strategi es. Nevertheless a partial transition to a funded system may be a way to ov ercome the current demographic crisis because it replaces missing human cap ital with real capital and helps smooth tax and child rearing costs across the generations.