An important issue sweeping the globe is the immediate impact of worldwide population aging on the provision of old age pensions. Recognition of the trend in aging has spurred an extensive debate on measures to ensure the provision of postretirement livelihood for elderly citizens (Economist 2002, Chand and Jaeger 1996). This subject has led to a new breed of specialists in pension reform who advocate various proposals based on their political, social, or economic biases. As a result, there is a heated debate on pension reform involving extreme positions that are often supported by parties with vested interests. Widely divergent views in the debate have, unfortunately, blurred the distinction between differences based on values and political leanings and those based on differences in economic analysis (NASI 1999, ACSS 1997, Barr 2000). In addition, two distinct issues to be considered with respect to any proposed reform are (a) what the system should look like for the future, and (b) how one should achieve that system if it is different from the current model given present economic and political realities (the transition problem). Analysts have strong and differing views on both these issues (ACSS 1997, Schieber and Shoven 1999).

The problem of pension reform has acquired new urgency. Many countries adopted an innovative scheme for financing pensions. First proposed by Chancellor Otto von Bismarck in the nineteenth century and then adopted by many countries in the 1930s, this scheme is called “pay-as-you-go” (PAYGO).