Marco A. Espinosa-Vega and Steven Russell
Economic Review, Vol. 84, No. 4, 1999
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Governments of countries around the world, including the United States, are considering implementing social security reform programs. In most cases, one of the principal goals of the reform program is to convert a pay-as-you-go social security system into a fully funded system. Most economists believe that the long-run macroeconomic benefits of a successful transition to a fully funded system are likely to be large relative to the benefits from social security reforms of other types.
The authors of this article describe the basic differences between pay-as-you-go and fully funded systems and explain why these differences are important. They also point out, using Mexico as an example, that it may be difficult to determine which type of social security system a country actually has and even harder to predict whether it will succeed in switching from one type of system to the other.
As this discussion indicates, the authors believe there may be some room for doubt that Mexico's new social security system is or ever will be fully funded. Instead, the new system may be a pay-as-you-go system of a somewhat different type. This same possibility also applies to other countries that are conducting social security reforms. The authors conclude that the information needed to determine whether these countries are likely to succeed in setting up fully funded systems will be revealed only slowly over time.
December 1999