Different Approaches to Pension Reform from an Economic Point of View

Abstract

Most social security systems around the world are operated on a pay-as-you-go (PAYGO) basis. Taxes collected from working people today are routed directly to pay the benefits of current retirees. Now these systems are faced with rapidly aging populations, increasing the number of retirees relative to the number of persons in the labor force. In addition, employees in most countries are leaving the labor force at younger and younger ages, further increasing the ratio of retirees to employed persons. The combination of these two trends, together with generous retirement benefits in many countries, has placed social security systems around the world under enormous financial stress. This chapter explains the nature of the problem faced by social security systems and then describes the various approaches that might be used to address the problem, commenting on the economic features of each. A commentary and discussion summary are also included at the end of the chapter.

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