Fully-funded public old age pension programs : stranger than paradise?

This paper discusses two topics which are at the very center of the ongoing political debate on public pension reform. First, we deal with the puzzle that there is a public pension system at all from a purely neoclassical point of view. Second, we address the issue which is considered the hottest in the social security discussion: Is there a transition from a PAYGO system to a funded system which is welfare-improving? The paper provides answers to both problems by telling the standard social security story in a different order. Most importantly, we introduce a "good" which the initially old hold but cannot eat, the initially young, however, do not hold but could eat if they had it. The paper states that this assumption does the job to tell a social security story which makes sense in terms of standard welfare economics and motivate a welfareimproving pension reform with a transition from a PAYGO to a funded system at its center.