This article analyses the implications of switching from unfunded to funded pension systems. It is plausible that in the long run and on
average people would be better off if pensions were funded. But in the transition from an unfunded to a funded scheme funds need to be
accumulated and that requires national saving to be higher. While deficit financing can, under certain circumstances, help spread the burden
of the transition across generations the scale of extra debt that might be needed in many European countries is problematic in the context of
Monetary Union. Ultimately, it is likely to prove hard to make significant headway towards greater funding of pensions in Europe without
some people being worse off. The task is harder the more generous are existing state pensions, the more rapid is the ageing of the population
and the more constrained is the government in using deficit financing. Given all this the UK is in a relatively good position (vis a vis rest of
Europe) to complete a transition which, arguably, began almost twenty years ago. Things are much tougher on the Continent.
But there are more than transitional issues. Unfunded pension schemes can help people insure against shocks that affect particular
generations and because such schemes often involve intra-generational redistribution (because linkage between contributions made and
pensions subsequently received is often quite low), as well as inter-generational transfers, they can help compensate for missing insurance
markets. A key question for those who advocate a complete move to funded schemes is how the redistributive and insurance roles that are
played, to varying extents, by state-run, unfunded pension schemes could be achieved by other means.
