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Pay-As-You-Go versus funded systems. Some critical considerations

Author

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  • Eladio Febrero
  • Maria-Angeles Cadarso

Abstract

Longer life expectancy and lower fertility rates will lead to an ageing population in most Western countries. This is thought to make earnings-based defined-benefit pay-as-you-go pension schemes unviable in the near future. Some economists suggest shifting towards a capitalized funded system grounding their proposal on the following advantages: (i) it raises national saving, thus leading to a faster rate of accumulation and a larger per capita income; (ii) it offers a higher rate of return on savings; (iii) it is immune to demographic shifts. In this paper we explore the fundamentals of these advantages, and conclude that the theoretical basis supporting them is very weak. We base our theoretical standpoint on the Sraffian-based capital critique and the theory of endogenous money. Additionally, we defend a parametric reform of a standard PAYG using figures that correspond to the Spanish economy for the period 2001-70.

Suggested Citation

  • Eladio Febrero & Maria-Angeles Cadarso, 2006. "Pay-As-You-Go versus funded systems. Some critical considerations," Review of Political Economy, Taylor & Francis Journals, vol. 18(3), pages 335-357.
  • Handle: RePEc:taf:revpoe:v:18:y:2006:i:3:p:335-357
    DOI: 10.1080/09538250600797792
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    References listed on IDEAS

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    1. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    2. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    3. Modigliani, Franco, 1986. "Life Cycle, Individual Thrift, and the Wealth of Nations," American Economic Review, American Economic Association, vol. 76(3), pages 297-313, June.
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    5. Graziani,Augusto, 2003. "The Monetary Theory of Production," Cambridge Books, Cambridge University Press, number 9780521812115, May.
    6. John F. Henry & L. Randall Wray, 1998. "Economic Time," Macroeconomics 9811004, EconWPA.
    7. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
    8. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-926, Sept./Oct.
    9. Sergio Cesaratto, 2005. "Pension Reform and Economic Theory," Books, Edward Elgar Publishing, number 2081.
    10. Louis-Philippe Rochon, 1999. "Credit, Money and Production," Books, Edward Elgar Publishing, number 1565.
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    Cited by:

    1. 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 Economía Aplicada, Estudios de Economía Aplicada, vol. 33, pages 783-800, Septiembr.
    2. Renuga Nagarajan & Aurora A.C. Teixeira & Sandra T. Silva, 2013. "The impact of population ageing on economic growth: an in-depth bibliometric analysis," FEP Working Papers 505, Universidade do Porto, Faculdade de Economia do Porto.
    3. repec:zbw:rwirep:0238 is not listed on IDEAS
    4. Jopp, Tobias Alexander, 2011. "Old Times, Better Times? German Miners' Knappschaften, Pay-as-you-go Pensions, and Implicit Rates of Return, 1854–1913," Ruhr Economic Papers 238, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Tobias A. Jopp, 2011. "Old Times, Better Times? German Miners’ Knappschaften, Pay-as-you-go Pensions, and Implicit Rates of Return, 1854–1913," Ruhr Economic Papers 0238, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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