We classify social security pension systems in three dimensions: actuarial versus non-actuarial, funded versus unfunded, and defined-benefit versus defined-contribution systems. Recent pension reforms are discussed in terms of these dimensions. Shifting to a more actuarial system reduces labor-market distortions, although limiting the scope for redistribution. Shifting to a funded system may increase saving, redistribute income to future generations and distort contemporary labor supply. A partial shift to a funded system helps individuals diversify their pension assets. A shift from a defined-benefit to a defined-contribution system means that income risk will be shifted from workers to pensioners.

We characterize pension systems along three dimensions: 1) actuarial vs. non-actuarial, 2) funded vs. pay-as-you-go, 3) defined-contribution vs. defined-benefit. Increasing the degree of actuarial fairness, by strengthening the linkage between contributions and benefits, reduces labor market distortions and may increase welfare in a Pareto-efficiency sense. Increasing the degree of funding implies mainly a redistribution of income among generations, although a partial shift to funding also provides better risk-return combinations for individuals. Shifting from defined-benefit to defined-contribution schemes (with fixed contribution rates) shifts the income risk from workers and taxpayers to pensioners.