Abstract
In this article, I show that Pareto-improving transitions from pay-as-you-go to fully funded pension systems nearly always exist. To demonstrate this, I classify theoretical results according to the type of reformed economy, the form of pension benefits, and the policy instruments used during the transition. Along the way, I analyze various economies not considered in the existing literature. Then, I show the possibility of a Pareto-improving transition for an economy where agents are heterogeneous within generations. I state that intergenerational heterogeneity should no longer be considered an obstacle when implementing Pareto-improving pension reforms. To maintain redistributive or insurance mechanisms supported by pay-as-you-go systems, I propose to replace inefficient social security with redistributive tax and transfer payments inside one generation. This would save the economy from the inefficiency related to the implicit taxes on pension contributions imposed by pay-as-you-go systems.