Comparison of internal rates of return from intergenerational transfer systems (Michael R.M. Abrigo)
Income flows do not necessarily match consumption levels at different stages of the lifecycle. Transfers among different generations are thus necessary to cover this income-consumption gap. While the extent to which different economies mix public and private institution-mediated transfers is well studied in the literature, the mechanisms to arrive at the optimal mix are not well understood. Using modified internal rates of return calculated for different public and private transfer systems, gains (or losses) from the different systems are compared. Preliminary results show a striking conundrum—among the intergenerational transfer systems surveyed, economies with higher-than-market implied rates of return rely more on asset-based reallocations rather than transfers to finance the lifecycle income-consumption gap.