1 Introduction
In the past, Pay-As-You-Go-financed pension schemes (PAYG) have been established in almost all
western countries. As is well known, PAYG-financed systems generate a higher rate of return than
capital financed systems in the case of a large population growth and a large increase of the income
per head in comparison with the interest rate. However, that was no longer true in the late 1960s and
1970s when population growth came to a halt and the interest rate started to grow. As a result, the
contribution rate for the old-age pension schemes has increased and will remain to increase in the next
two or three decades. A major question from a policy point of view is the question of whether or not
people remain willing to maintain the PAYG-system in spite of the fact that for the young at least the
intergenerational redistributions, engendered by the PAYG-system will have a negative effect on
lifetime income. More specifically, what role play solidarity, altruism and fairness in the support of
a public pension system? How do people evaluate their situation if the structure of the scheme changes
and, as a consequence, the extent of fairness and (required) solidarity changes? What is a fair rate of
return for various generations?
A method to detect individual preferences and thereby feelings of altruism and/or fairness, is by direct
observations of people’s behaviour. However, individuals can only marginally choose their ’optimal’
pension. Furthermore, individuals’ pensions are mostly determined by institutions, which have changed
considerably in the past fifty years. Hence, instead of using some revealed preference method, we opt
for stated preference methods (see e.g. Kroes and Sheldon (1988)). In these methods individuals are
induced to make statements about their preferences. In our study individuals have been asked to
evaluate changes in their and other individuals’ incomes and rates of return due to hypothetical changes
in the old-age pension system. For this purpose a questionnaire has been developed. This questionnaire
is described in Section 3. However, we start in Section 2 by indicating the possible effects of
considerations of altruism and fairness via a limited overview of the literature on altruism and fairness.
The model is also presented in Section 3. Three generations are distinguished in this model. Feelings
of altruism and / or fairness are measured by assuming that they have an impact on utility. Section 4
presents the estimation results. We find, among other things, that feelings of altruism and fairness affect
utility. The size of the effect differs among generations. The elasticity of altruism for the youngest
generations is about 0.3 whereas it is probably not significant for the older generation. The elasticities
of fairness are considerably lower: they vary from 0.001 to 0.005. However, in some cases it turns out