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Transition to fully funded pension schemes: a non-orthodox criticism

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  • Sergio Cesaratto

Abstract

The paper critically examines the dominant neoclassical views on the adoption of mandatory Fully Funded (FF) pension schemes as a partial or complete substitute for the unfunded Pay-as-you-go (PAYG) type. According to this view, such a transition will have the positive real effect of endowing future generations with higher capital and output per head, since it should cause a once and for all increase in aggregate saving and the capital stock. This would prepare the economy for future demographic developments. We examine three obstacles to such a claim. To begin with, the reform may fail to boost workers' marginal propensity to save, since workers may contract their voluntary saving to compensate for the larger mandatory saving to FF schemes. Second, if PAYG's payroll contributions are reduced and diverted to Pension Funds, the larger private saving supply will be balanced by lower government saving, if the government is committed to honouring the current pension payments. Third, Keynes's saving paradox, reinforced by the capital theory critique inspired by Sraffa, shows that the rise in the marginal propensity to save does not result in an increase in capital accumulation, but rather in a fall in income and employment. Copyright 2006, Oxford University Press.

Suggested Citation

  • Sergio Cesaratto, 2006. "Transition to fully funded pension schemes: a non-orthodox criticism," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 30(1), pages 33-48, January.
    • Handle: RePEc:oup:cambje:v:30:y:2006:i:1:p:33-48
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    File URL: http://hdl.handle.net/10.1093/cje/bei046
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    Cited by:

    1. Codrina Rada, 2012. "The Economics of Pensions. Remarks on Growth, Distribution and Class Conflict," Working Paper Series, Department of Economics, University of Utah 2012_02, University of Utah, Department of Economics.
    2. María del Carmen Valls Martínez & José Manuel Santos-Jaén & Fahim-ul Amin & Pedro Antonio Martín-Cervantes, 2021. "Pensions, Ageing and Social Security Research: Literature Review and Global Trends," Mathematics, MDPI, vol. 9(24), pages 1-25, December.
    3. Sergio Cesaratto, 2006. "Pensions in an ageing society: a symposium," Review of Political Economy, Taylor & Francis Journals, vol. 18(3), pages 295-299.
    4. Antón Pérez, José Ignacio, 2006. "The Reform of the Pension Systems in Easterm Europe and these Impact about the Efficiency and Equity/La reforma de los sistemas de pensiones en Europa del Este y su impacto sobre la eficiencia y la eq," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 24, pages 643(20á)-64, Agosto.
    5. Mariangela Bonasia & Oreste Napolitano, 2006. "The Impact of Privatisation of Pension System on National Saving: The Case of Australia and Iceland," Discussion Papers 3_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    6. Volker Meinhardt & Katja Rietzler & Rudolf Zwiener, 2009. "Konjunktur und Rentenversicherung - gegenseitige Abhängigkeiten und mögliche Veränderungen durch diskretionäre Maßnahmen," IMK Studies 03-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. Bermejo Patón, Fernando & Febrero Paños, Eladio & Uxó González, Jorge, 2015. "La sostenibilidad del sistema español de pensiones: Una aproximación alternativa/Sustainability of the Spanish Pension System: An Alternative View," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 33, pages 783-800, Septiembr.
    8. Sergio Cesaratto, 2008. "The Macroeconomics of the Pension Fund Reform and the case of the TFR reform in Italy," Department of Economics University of Siena 549, Department of Economics, University of Siena.
    9. Álvaro Martín Moreno R. & Fabio Ortiz, 2010. "Economía política de la reforma del sistema colombiano de pensiones," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 12(22), pages 167-192, January-J.
    10. Teresa Ghilarducci & Karthik Manickam, 2023. "A Critical Survey of Pension Provision And Pension Reform," SCEPA working paper series. 2023-04, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    11. Alan Walker & Liam Foster, 2006. "Caught between virtue and ideological necessity. A century of pension policies in the UK," Review of Political Economy, Taylor & Francis Journals, vol. 18(3), pages 427-448.

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