The Controversy Between the Pay-As-You-Go System and the Fully-Funded System in Old-Age Security

Abstract

In many countries pension reform is on the political agenda. There are two different reasons for this. In Western countries it is the ageing of society, while in Eastern countries it is the heritage of an insufficient pension system that has to be adapted to the challenge of a market economy. The starting point for all countries is the pay-as-you-go (PAYG) system. In some formerly socialist countries this scheme has been rejected for purely ideological reasons. These countries prefer the fully-funded (FF) system as a market economy alternative, believing that privatisation guarantees efficiency per se, a belief supported by the World Bank (1994).