Abstract
This paper provides a three-generation OLG model for analyzing a privatization of PAYG old-age social security with linear benefit formulas. Furthermore, it proposes an explicit reform for how the privatization transition may be undertaken. The paper then continues to analyze the possibilities of a Pareto-improving privatization, given the proposed reform. The set of government policy instruments is limited to debt issuing and proportional labor income taxation. Contrary to models where a two-generation OLG framework is used, the three-generation framework creates possibilities for a Pareto improving privatization of old-age social security, since the PAYG system induces a non-optimal implicit tax over the life cycle. By shifting to an optimal tax policy can not only the pension claims accrued under the PAYG system be financed but the shift will also be Pareto-improving.