The Design of Optimally Balanced Pay-as-you-go Social Security Systems
TLDR
This paper designs optimally balanced pay-as-you-go social security systems by integrating general equilibrium theory and a new backward calculation algorithm.
Key contributions
- Integrates social security design with general equilibrium theory for optimal systems.
- Employs Dognini's (2025) backward calculation algorithm for optimal monetary equilibria.
- Applicable for reforming pay-as-you-go systems in countries undergoing demographic transitions.
- Illustrated using demographic and productivity data from five major countries (1950-2070).
Why it matters
This paper offers a novel, theoretically sound method for designing and reforming pay-as-you-go social security systems. It is particularly crucial for nations grappling with demographic shifts, providing a robust framework to ensure long-term financial stability.
Original Abstract
This paper bridges social security design and general equilibrium theory to conceive optimally balanced pay-as-you-go systems. The design is based on the backward calculation algorithm from Dognini (2025), which is used to find optimal monetary equilibria of prone-to-savings non-stationary overlapping generations economies with heterogeneous households. In particular, this algorithm makes the design applicable for reforming pay-as-you-go systems in countries undergoing demographic transitions. Due to households balanced budgets under equilibrium prices (i.e., Walras' law), these optimally balanced pay-as-you-go systems resemble the well-known notional accounts systems. The design is illustrated in a simplified framework using the past and forecast demographic and productivity dynamics of Brazil, China, India, Italy, and the United States from 1950 to 2070.
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