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The Transition From a Pay-As-You-Go to a Fully-funded Social Security System: Is There a Role for Social Insurance
This paper develops a model to examine the effects of introducing a fully-funded government sponsored pension plan into an overlapping generations model with an extant pay-as-you go social security system. We examine whether individual and social welfare can be improved by phasing out the current pay-as-you-go system and replacing it with a fully-funded system in which pension benefits are at least partially annuitized. Furthermore, we consider the effects of means testing social security benefits and providing a income guarantee funded in a pay-as-you-go manner. We find that the presence of risky investments increases the likelihood that the maintenance of a portion of the pay-as-you-go system, through a minimum retirement income guarantee, will be welfare improving.