Prefunding the unfunded system

Abstract

We have presented Theorem 9.1 (neutrality) in Chapter 9 in its most concise form, which shows that under certain ideal conditions there is a scenario (no pain-no gain), where prefunding an unfunded system can be costless but such a transition is superfluous. This description may not convince everyone because it does not spell out the details and ignores other scenarios. In this Chapter I try to fill these gaps. Presentation of mathematical details will be followed by two other scenarios, double burden and voluntary joining. The three scenarios are analyzed from the cost-benefit viewpoint. We shall use the following three ideal conditions: (a) the operating costs and (b) the participation rates of the working age population are the same in both systems; (c) the efficiency of production, the growth rate of output, and the rate of interest are independent of the capital/labor ratio. The assumption of dynamic efficiency r > vg is accepted here.