In 1990 in the U.S.S.R., a large and demographically diverse country, social security reforms led to the imposition of a uniform system of benefits that involved interregional transfers. Since the dissolution of the U.S.S.R., this system is no longer feasible and other options must be considered, including during the successor countries’ transition to market economies.
This paper presents a simple demographic model to compare pay-as-you-go (PAYG) and funded options for providing benefits. It concentrates on pensions and standardized family allowances although the argument could be extended to provisions for the unemployed.
The empirical investigations, for Belarus, Russia, Turkmenistan, Ukraine, and Uzbekistan, illustrate the effects of different demographic characteristics in the European and Central Asian countries in 1991. They show that if interest rates are negative in the medium term, a move away from a PAYG system would be undesirable and, specifically, that a move toward a funded system would greatly increase contribution rates. Even if rates of return are positive, they would need to exceed population growth rates for a funded system to be desirable. Thus, the funded option would be less attractive in the Central Asian countries than, say, in Belarus or Ukraine.
Alternative methods of lowering net overall outlays are also discussed, including the basic benefit-in-kind system that involves providing basic food items through food stamps or the cash equivalent. The paper concludes that a combination of PAYG benefits and basic benefits in kind would be most effective in minimizing overall costs while providing adequate benefits during the transition period.