State Finance Challenge Practice Test

Pay-as-you-go financing funds current benefits from current revenues. In post-employment programs, the benefits paid to retirees come out of the taxes or payroll contributions collected in the present period, rather than from assets that were set aside in advance. That makes the defining feature the use of current revenues to cover benefits.

Funding from accumulated assets describes a funded approach, not PAYG. While actuarial valuations may appear in many pension contexts to assess sustainability, they aren’t the defining trait of PAYG. And assuming no long-term cost implications ignores how demographic shifts can affect the ability to meet future benefits with current revenue, creating sustainability concerns over time.