As economists and policy makes ponder the lessons of the last two turbulent years, many troubling questions remain. What went wrong? Why did policy makers fail so abysmally to take preventative action? Why were economists so completely taken by surprise?

The paper uses an overlapping generations model to analyse the problem of a benevolent planner determining the pay-as-you-go tax rate and the level of funded savings, in an economy where both are policy variables. We characterize the conditions under which it is desirable to have both a positive...