Principles of financing social security pensions

This paper aims to provide a framework for debate on the financing of social security pensions. It begins with some basic principles related to the economics of financing social security. It then focuses on the prominent subtopics that arise in connection with financing discussions and how these subtopics relate to each other. The first section discusses the basic principles: (1) the rationale for government intervention in the market for retirement income, (2) the factors that combine to determine the social costs of supporting pensioners, (3) the mechanisms used to deliver the support to pensioners and allocate the costs and (4) the important role played by political and cultural influences in determining the actual economic impact of a particular institution. The next section focuses on ways that societies can alter the burden of supporting retired people. These include changes in relative incomes, in economic growth rates, in labour supply rates and in administrative cost. A third section concentrates on the distribution of benefits and costs among members of a particular birth cohort as well as between and among cohorts. This section also explores the relationship between programme structure and the extent of programme coverage. The fourth section discusses the challenge of assuring that the system remains economically and politically viable in the long run. It notes in particular the role that political traditions play in influencing how programmes structured in particular ways develop. The paper closes with a summary and some concluding observations.