Question

Lalaland is an extremely stable country with 200,000 residents, half of whom are young workers and half of whom are retirees. At the end of each “year,” the 100,000 retirees die, the 100,000 young workers retire, and 100,000 new young workers are born. Workers earn a total of $5,000 for the year. Lolland operates a “pay as you go” social security system, where each current worker is taxed $2,500 and the revenue collected is used to pay a $2,500 pension to each retiree. The neighboring country, Gogovia, is larger and more dynamic. Gogovia has an active stock market that Lalalandians can invest in and earn a 10% rate of return. It also has an active banking
sector, which will gladly lend the Lalalandian government money, charging them 10% interest per year. Lalaland is considering moving to a system of personal accounts, where each Lalalander would take her $2,500 and invest it in Gogovian markets (and earn a much higher rate of return!). The government would borrow $250 million ($2,500 × 100,000) from Gogovian bankers to pay for current retirees. It would then tax retirees each year by just enough to pay the interest on this debt. Would this new system be better or worse for Lalaland?


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  • CreatedApril 25, 2015
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