IN DEFENSE OF PAY-AS-YOU-GO (PAYGO)FINANCING OF SOCIAL SECURITY

BY Robert L. Brown*

ABSTRACT:

Today’s proposals to create larger social security funds and then invest them in the private sector are intended to create more rapid economic growth, which would make it easier to pay social security benefits in the long run. These proposals are also aimed at enhancing intergenerational equity by making today’s workers pay for a greater proportion of their future benefits.

The important public policy issues inherent in such proposals are numerous:

• questions of whether prefunded social security plans are demographically immune;
• whether prefunding social security can increase gross national savings and worker productivity;
• whether there are better ways to create a healthy economy;
• whether social security is best offered as a defined-benefit plan or a defined-contribution plan.

This paper explores each of these important public policy issues in the context of the social security systems of Canada and the U.S.


자료: IN DEFENSE OF PAY-AS-YOU-GO (PAYGO)FINANCING OF SOCIAL SECURITY

메모:

• This paper discusses the issues surrounding the level of funding for the social security systems in Canada and the U.S., which is an important public policy agenda item at this time. The paper does not present a balanced discussion of the issues; rather, it presents a defense of pay-as-you-go (paygo) financing as the preferred method. Many authors are now speaking in favor of a more fully funded system (see, for example, Robson 1995, Slater 1995, World Bank 1994, and Kotlikoff et al. 1996), and they appear to have the ear of policymakers.
• For the discussion that follows, the meanings of the words paygo and funded need to be carefully understood. Neither word is taken in its absolute meaning. For example, paygo funding is not to meant to imply no contingency fund at all. In fact, the paper assumes that:
  
  (1) any system that carries only a small contingency (no more than two years of benefit expenditures) is a paygo system.
  (2) Similarly, funded does not mean absolutely fully funded; any scheme that creates investable funds measurably larger than a small contingency reserve is included in the categoryof ‘‘prefunded’’ schemes. ...
• The Old Age and Survivors Insurance and DisabilityInsurance (OASDI) system today has a fund that is expected to grow for the next decade or so. However, that fund is not expected to exceed two years’ worth of benefit expenditures (or if so, only slightly). Thus,this paper categorizes the OASDI system as paygo.