Pareto-improving social security reform

It is generally accepted that moving from an unfunded to a funded social se curity system implies a welfare loss for the transition generation-that is, the generation that has to pay twice: first, saving for its own retirement and, second, contributing to the pensions of the then retired generation. This article shows that in a setting of endogenous growth with positive ext ernality such a transition can be Pareto improving. But it argues also that social security reform is more a pretext than a requirement for internaliz ing such a positive externality.