As is well known, nearly every country in the world will soon be facing very serious financial challenges in order to maintain the historically increasingly generous level of social insurance benefits (in the case of OECD countries), or to establish or expand nonexistent or minimalist social security programmes (in the case of Asia and many developing countries). The main driving force behind these financial problems is the 'demographic shift' that starts with the aging baby boom generation, and will usher in a new steady state world population that has a much higher fraction of elderly than has ever before been experienced in world history. Most government sponsored old age retirement programmes are financed on a 'pay as you go' basis, similar to the social security system in the USA. The demographic shift has two key implications for these programmes: (1) the reduction in population growth rates as world population levels off implies that the rate of return to pay as you go systems will fall relative to rates of return to 'privatized' or fully funded pension schemes that invest retirement savings/tax contributions at market rates of interest, (2) social insurance tax/contribution rates will have to rise significantly in order to maintain the relatively generous level of retirement benefits that have been offered to previous cohorts.
Thus, many different countries will soon be facing the prospect of making serious adjustments in their social insurance programmes, either by increasing tax rates, reducing benefits, or both. These programmes have generally been very popular both in the USA and in Europe, and until recently it was politically risky to propose major reforms to any of these programmes. However, the public is now quite aware that significant changes in these systems are inevitable, and this has provided new opportunities for creative thinking about how to design improved 'second generation' social insurance programmes (in Western countries), and an opportunity for Asian and developing countries to introduce new social insurance systems that might be more efficient and cost-effective than the first generation of social insurance programmes that have their origins in the German social insurance scheme introduced in the late 1800s by von Bismarck and in the USA following the great depression by Franklin Roosevelt.
We believe that economic theory and econometric methods provide key tools to facilitate the design of improved social insurance programmes and institutions. Unfortunately, many policymakers in the USA and Europe are not familiar with many of the key results in a burgeoning new theoretical and empirical literature on social insurance, and the 'policy models' used by governments are relatively crude and out of date compared to the state of the art in the academic literature. At the same time, young researchers who are considering doing work in the area of social insurance modelling face dauntingly high 'entry costs', especially to do empirical work. Not