We have all heard the mantra that social security is going to hell. Whether this is true or not, it is now generally accepted that a fully funded social security system is superior to a pay-as-you-go system. The issue is the transition, as switching from the latter to the former leads to a generation missing out (the old one) or one generation force to save doubly (the young one). This is especially bothersome because of current demographic change.
The problem essentially is that while you have a Pareto improvement when comparing the two systems in steady state, such Pareto improvement is impossible during a transition. For example, the current old generation, whose retirement is currently funded by the young generation, would lose in a switch when the young ones suddenly contribute to their own retirement. Such a transition has somebody losing compared to the current status quo, so no Pareto improvement may seem possible.
Not so, say Juan Conesa and Carlos Garriga. If you combine social security reform with optimal fiscal policy one can obtain a Pareto improving transition. The key here is the ability to differentiate tax rates by age. Essentially, you want to subsidize labor income for older people during the initial phase of the reform, and then gradually get to a steady state schedule that assume almost identical tax rates across age groups. It is just the opposite for capital income tax rates. All flat and positive initially, and then decreasing with age in steady state, with subsidy for the older ones.
PS: This evening is the final of the men's NCAA basketball tournament. See what view you have for $275 tickets.