Paying for Pensions and Other Public Expenditures: Overtaxing our Children?∗

This paper argues that although current public pension schemes may shift the major financial burden to future generations, private and public transfers of wealth across generations offset this development. As a result the financing of existing social security and pension arrangements seems to be less problematic than commonly assumed. Policy models that assume there is no linkage between generations except through the state bear little resemblance to empirical reality. An accounting system is therefore needed which highlights the allocation of retirement costs among working and retired population as well as future generations, and includes the public as well as private ledger. Many of the aformentioned features are included in the well-established practice of ‘Generational Accounting’. This paper, however, will integrate private as well as public intergenerational transfers of wealth so as to account not only for the burden, which current generations leave, but also the wealth, which is passed on to future generations.