Chart 2 shows OECD estimates of the scale of deficits that these demographic shifts could cause to unfunded pension schemes in various countries (see Roseveare et al (1996)).
This observation illustrates the obvious point that a comparison between funded and unfunded pension schemes depends crucially on the portfolio of assets that is acquired with contributions.
Unfunded pension schemes represent a form of insurance against such risks because the value of pensions paid to the current retired depends upon the labour income of another generation.
Unfunded pension schemes can help people insure against shocks that affect particular generations and because such schemes often involve intra-generational redistribution (because linkage is often quite low), as well as inter-generational transfers, they can help compensate for missing insurance markets.
Samuelson (1958) pointed out long ago that in a steady state - where population structure is assumed constant, as is the contribution rate into a balanced PAYG pension scheme - the effective return on contributions made to an unfunded pension scheme is equal to the growth of the aggregate wage bill (which is the sum of growth in real wages per person and of the number of workers).