Privatizing social security: a critical assessment

The purpose of this paper is to provide a critical evaluation of theoretical models showing that shifting from pay-as-you-go to funded social security schemes can be made Pareto-improving. Further, it argues that what often makes a reform toward funded schemes attractive is a number of additional features that could have been introduced as well in the unfunded social security system. The paper is organized in three main sections. The first presents a taxonomy of social security systems; this allows for showing that in privatization programs the issue is not just moving from unfunded to fully funded techniques, but also, and above all, individualizing the system is such a way that there is no more redistribution. The second shows that funded and pay-as-you-go schemes are perfectly equivalent as long as the payroll taxes paid during the period of inception of the pay-as-you-go scheme are duly invested. Finally, the third section presents two models of Pareto-improving social security reforms and discusses the assumptions on which they rely.