Funding Social Security: The Transition in a Life-Cycle Growth Model

A life-cycle growth model is used to investigate the quantitative impact of gradually converting the financing of social security from pay-as-you-go (PAYGO) to full funding. The magnitudes of the losses and gains that particular age cohorts will experience under alternative speeds of conversion are estimated using empirically-reasonable parameter values based on the econometric literature. Transition path simulations of a gradual three-generation (90-year) conversion show small losses to current workers, but large gains to children and grandchildren of young workers, and even larger gains to future descendants.