Alternative Theories of Pensions – 20 years after Pension reforms and Economic Theory

These notes compare the interpretations of pay-as-you-go (PAYG) and fully funded (FF) pension systems and proposals of reform provided by alternative economic theories. After outlining the debate on the intra-temporal or intertemporal nature of PAYG, we will focus on the issues of pension reforms aimed at expanding the funded pillar. We will particularly discuss the issue of the transition from PAYG to funded systems. Mainstream support for reforms has often been based on comparing the rates of return on contributions from the two systems. Criticism of the funded pillar has often been heard from heterodox economists being based on the relative higher risk of capitalization. However, both points of view neglect the issue of transition, as if the choice were in the abstract between PAYG and the FF pillar. In this sense, twenty years ago Cesaratto (2005) contributed to fill a severe gap both in conventional and in post-Keynesian analyses. Other innovative contributions will be noted in passing, such as the outline of a classical surplus-theory of the social state and of the role of public pension-spending in demand-led output theories.