Explain the difference between fully funded social security system and pay-as-you-go social security system
What will be an ideal response?
Fully funded social security system taxes workers, invests their contributions in financial assets, and pays back the principal plus the interest to the workers when they retire. Pay-as-you-go system taxes workers and redistributes the tax contribution as benefits to the current retirees. There are two major differences between the two systems. First, what retirees receive is different in each case. Second, the two systems have different macroeconomic implications. In both systems private saving goes down. But in the fully funded system, public saving goes up and it has no effect on total saving and no effect on capital accumulation. In the pay-as-you-go system, the decrease in private saving is not compensated by an increase in public saving. Total saving goes down, and so does capital accumulation.
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