Funded Social Security Systems: A Review of Issues in Four East Asian Countries

Abstract

This paper reviews the structure and economic effects of the fully-funded centralized public pension programs in several East Asian countries. The major weaknesses of these programs are variable and often inadequate replacement rates as well as poor population coverage. Aside from encouraging development of financial markets, their chief virtue is their avoidance of economic distortions associated with the alternative pay-as-you-go approach. Growth-modeling exercises surveyed in the paper suggest that such distortions are the main way in which social security affects aggregate welfare in the long run. The paper therefore argues that expected pay-as-you-go based reforms should involve introduction of minimal flat-rate schemes as supplements to the existing systems.