Economic and Distributional Effects of Demographic Shifts: Evaluating Pay-as-You-Go and Fully Funded Pension Schemes Based on the Greek Experience
By Zois Gerasimos Katsimigas & Christos Papatheodorou
This paper examines economic and distributional consequences of demographic shifts by comparing pay-as-you-go (PAYG) and fully funded (FF) pension schemes in a macroeconomic framework, using Greece as a case study. Facing acute ageing and population decline, Greece provides a unique context to assess the performance of these schemes. We develop a post-Keynesian stock-flow consistent (SFC) model calibrated to the Greek economy to simulate the macroeconomic and distributional outcomes of both schemes under projected demographic changes. The analysis evaluates dynamic interactions between pension structures, economic activity, and income inequality across seven household groups and six institutional sectors. Findings suggest that, under certain conditions, the PAYG scheme remains fiscally sustainable while promoting growth and equity. Conversely, the FF scheme, though fiscally insulated, delivers lower pensions due to adverse feedbacks from income distribution, exacerbating inequality and weakening growth. These insights challenge conventional emphasis on fiscal sustainability, advocating a broader perspective in pension reform.
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