To preserve solvency,a pay-as-you-go(PAYG)pension system needs to adjust contribution rates and pension promises over time.Currently,it is not possible to hedge in the financial market against politically determined uncertainty as regards these parameters.I consider a policy reform whereby property rights are established on the implicit lifetime tax levied by PAYG finance,and are assigned to the pension institution.These property rights are well defined if the reform also features rule-based allocation of aggregate risk,in the form of defined-contribution or defined-benefit schemes.I show that a PAYG pension system may indeed be instantly restructured so as to minimize political risk and allow financial-market diversification of risk.A side benefit is securitization of human-capital flows,which are not traded in existing financial markets.The new securities,if traded in appropriately competitive financial markets,are complementary to the Motional Account reforms of the 1990s.However,fiscal instability can increase if securitization is implemented in the absence of initial solvency and credible adoption of rule-based methods to allocate aggregate risk.
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