Pension Reform and Economic Theory

Pension Reform and Economic Theory

A Non-Orthodox Analysis

Sergio Cesaratto

The book is the first of its kind to attempt to deal with the economics of pensions and ageing on the basis of a rigorous theoretical framework alternative to neoclassical economics. Sergio Cesaratto breaks the dominant conformism in the current pension debate and explains that the strength of the various reforms proposed depends on the validity of the economic theories on which they are respectively based. He also illustrates the relevance of the Sraffian criticism to undermine the theoretical core of the mainstream proposals.

Chapter 4: The Transition from PAYG to FF Schemes

Sergio Cesaratto

Subjects: economics and finance, public sector economics


* The key requirement is an increase in national saving. (Feldstein and Liebman, 2001, p. 70) [A]lmost all the authors seem to agree that it would simply be window dressing if the capitalisation consisted in investments in public debt. (de Finetti, 1956, p. 279, my translation) 4.1 INTRODUCTION We illustrated above Feldstein’s distinction between ‘tax design’ and ‘tax reform’. The former describes an economy at time zero that can freely decide between two tax arrangements just by comparing their respective individual and macroeconomic advantages. As we have seen, a perfect design context is never realized even if no existing mandatory pension system, PAYG or FF, is in place, since informal old-age provisions probably exist. More realistically, a reform context is related to an economy that has to decide whether to move from an existing institutional pension scheme to a different one. In this case, it will not be enough to judge on the basis of the relative benefits, since the costs and macroeconomic implications of moving from one arrangement to another have to be taken into account. To use a metaphor, once an original sin has been committed, it may be impossible or quite painful to redeem it. According to the dominant opinion the introduction of PAYG instead of an FF scheme in most industrialized countries is equivalent to an original sin. The fault lies in transferring income to support the (then) current retirees instead of using it to foster capital accumulation. As seen in the previous chapter, the possible...

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