Reducing the replacement rate will have no effect on the tax rate necessary to finance pensions under a pay-as-you-go, tax-financed pension system.

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Reducing the replacement rate, which is the ratio of a retiree's pension to their pre-retirement income, typically lowers the amount of benefits paid out. In a pay-as-you-go, tax-financed pension system, this reduction in benefits can decrease the necessary tax rate to finance the system, as it reduces the total payout required from the system.

Reducing the Replacement Rate Will Have No Effect on the Tax