The Design of Optimally Balanced Pay-as-you-go Social Security Systems

TL;DR

This paper develops a method for designing optimally balanced pay-as-you-go social security systems using general equilibrium theory and demographic data, applicable for countries in demographic transition.

Contribution

It introduces a backward calculation algorithm to design balanced social security systems aligned with demographic and economic dynamics.

Findings

The algorithm finds optimal monetary equilibria for heterogeneous households.

Designed systems resemble notional accounts under equilibrium conditions.

Application to countries shows potential reforms aligned with demographic trends.

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.