Longevity and PAYG pension systems sustainability

In this paper we study the effects of an increasing longevity on the balanced pay-as-you-go pension budget in the basic overlapping generations model of growth (Diamond, 1965). It is shown that, when the capital’s share in production is sufficiently high, the higher longevity the higher pension benefits. The policy implication is that there would be room for an increase, rather than the often threatened reduction, in future pension payments, by keeping unaltered the contribution rate paid by the young to finance pensions to retired people as well as a balanced PAYG pension budget.