ABSTRACT
In Part 1 we saw that an old-age pay-as-you-go pension system is a multidimensional entity of unusual complexity. After careful inspection, however, two important characteristics qf this system may be discerned. First, for purposes of short-run analysis the best way to view a pay-as-you-go pension system is that of a tax-transfer mechanism that redistributes income between successive generations. This approach was utilized in Chapter 6 to analyze the operation of the system in the short-run. Within a framework of long-run analysis, however, the tax of the tax-transfer mechanism is transformed into a contribution to a pension plan providing retirement and survivorship benefits. This second characteristic of a pay-as-you-go pension system implies an additional asset to the other assets of covered workers and their families. Each such household may enjoy the expectation of price-indexed retirement income to be provided by the government as a matter of right at the end of their working years. This “social security wealth” is an important, though often neglected, part of their total assets.
