The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
How much of an internal rate of return would a sustainable pay-as-you-go pension system offer
current and future generations equally? The answer is the sum of the Long-Run Biological
Interest Rates (LBIR), the real-world equivalent of Samuelson's (1958) biological interest rate, and
future productivity growth. Reflecting global population ageing, the median LBIR across
172 countries is as low as 1 percent per year. The LBIRs are particularly low in advanced
countries, estimated to be negative in many of them, and require ample financial reserves today
or future productivity growth to maintain participation in pension schemes. On the other hand,
the LBIRs in less developed regions, such as in sub-Saharan Africa, are relatively high, indicating a
potential to use a pay-as-you-go scheme to expand the coverage of public pensions. Raising the
retirement age by five years brings up the LBIR by 40 basis points, significantly improving the
long-run budget constraint of a pension scheme.