Expected Social Security Wealth Simulations and Generational Fairness of the Turkish PAYG System

Abstract

As it evolves around the world, Social Security financed on pay-as-you-go (PAYG) basis increasingly becomes a Ponzi scheme due to aging populations. The main objective of Social Security is to insure seniors against an uncertain life span. However, as the probability of being a net loser rises for coming generations, this objective receives questions with increasing public confusion: how does Social Security affect lifetime wealth? How could one calculate financial terms of Social Security for households in different generations? This paper calculates the aggregate social security wealth (SSW) series for the first time for an emerging country, Turkey. The simulations cover the period between 1970 and 2003 and the results show that the anticipated SSW is the biggest part of household wealth in Turkey and therefore it should not be ignored in economic studies. This paper also analyzes the redistributive characteristics of the system to understand its generational fairness by calculating its implicit internal rate of return and the net gains and losses from participating in the system for representative individuals in different age cohorts. The principal finding is that Social Security in Turkey constitutes significant wealth transfers among different age cohorts.