Editorial — Saving social security

• Published in: Journal of asset management Vol. 4; no. 3; pp. 148 - 151
• Main Authors: Modigliani, Franco, Muralidhar, Arun
• Format: Journal Article
• Language: English
• Published: London Palgrave Macmillan 01-10-2003
• Subjects: Alternatives; Bankruptcy; Costs; Funding; Insolvency; Pension plan funding; Pensions; Privatization; Reforms; Retirement; Social security; Trends; United Kingdom > UK
• ISSN: 1470-8272; 1479-179X
• DOI: 10.1057/palgrave.jam.2240100

Unless public pension funds - like Social Security - are promptly reformed, they face an unsavoury choice of raising contributions and/or cutting benefits. Public pension plans are financed by the current contributions of the younger working generations. Many well-meaning reformers have come out in favour of moving towards a type of radical restructuring of the current Pay-As-You-Go (PAYGO) system, which goes under the name of 'Privatisation of Social Security'. When all the flaws are taken into account, one must conclude that privatisation must be rejected unconditionally in favour of some of the existing alternatives that avoid individual accounts. An approach is presented, labeled 'risk diversification through a common portfolio'. It achieves lasting reform by gradually shifting from PAYGO towards a system more like a traditionally funded one - common in the corporate world - under which pensions are funded by the capital accumulated through lifetime contributions, while maintaining the attractive defined benefit structure.