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In some countries the main financing of the state pension system is pay-as-you-go. It is my understanding that in these systems the money you pay to the government while you work is not stored in some personal pension fund, the government merely keeps track of it, and uses the amount as a basis when they calculate your monthly pension once you retire.

Your "fund" never runs out1 but when you die there are also no "returns", your children do not get the "remaining balance".2 This also implies that the system does not guarantee that the amount you actually get paid is close to the amount you paid in, adjusted for interest.

In some countries income level is correlated with life expectancy. Thus it is possible that the share of poor people paying contributions but never earning a pension - dying early - is much larger than the share of rich people doing the same.

Has there been research (in any country with a state pension system) into which income segments (e.g. deciles) in the past were net contributors in PAYG systems? I understand it is possible that no or all income segments where net contributors; in this case is there some data regarding the different exent of their net contributions?


1 Except in case of a state default, but then its not just your fund.

2 There may be social contributions to widowers.

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    $\begingroup$ For the UK state pension system, most of your first two paragraphs apply, but there is one significant difference. Broadly, the monthly pension a person receives from state retirement age depends not on their total contributions while working but on the number of years over which they contributed. Contributions per year depend on income, so if A and B contribute over the same number of years but B has higher income, B will contribute more but still have the same pension. $\endgroup$ Feb 6 at 11:55
  • $\begingroup$ So in the UK, assuming he same life expectancy, the higher income people would subsidize the lower income pensioners. Interesting! Wonder if the differences in life expectancy would change that. $\endgroup$
    – Giskard
    Feb 6 at 13:37

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