Question

What are some reasons to think a fully funded retirement system of private accounts might perform better than a pay-as-you-go unfunded system? What are some reason to think it might not?

Answer 1

In the U.S. economy and most of the developed nations, there is a Pay-As-You-Go (PAYG) social security framework set up: every single youthful worker alive in a given period pay into a general fund managed by the Government (Trust Fund) through a payroll tax on profit. The old retirees alive in a similar period get benefits from the equivalent general fund. The PAYG framework includes an intergenerational move (from youthful to old alive simultaneously). This framework is unfunded, as in installments to retirees were not subsidized by investment funds of those equivalent people when youthful.

A fully funded framework is different: youthful workers are taxed, with the continue going to an individual retirement account (IRA) directed by the Government and contributed to certain securities. At the point when laborers are old and retire, they draw down the accumulated stock of savings on their accounts.

Advantages of a fully funded system,

Better deal with the aging population

Better rate of return on pension plans

Limited fiscal liabilities of the government

Removes labor market distortions

Increases capital market savings

Disadvantages

Investment risk on workers

The potential cost of government for providing minimum benefits

May create poverty in old age peoples