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 7: Classical and Neoclassical Perspectives on the Welfare State and Pensions

Sergio Cesaratto

Subjects: economics and finance, public sector economics


7.1 INTRODUCTION The previous chapter examined the macroeconomics of pension reforms in the light of the long-period theory of effective demand. This chapter compares the classical and neoclassical approaches to the theory of distribution, exploring the respective implications for welfare state analysis with special reference to the economic interpretation of PAYG pensions. This completes the examination of pensions in the perspective of the classicalKeynesian approach and the criticism of the neoclassical view. As we shall see, a classical analysis of pensions is not severed from the analysis of the determination of the wage rate and of the welfare state institutions specific to this theory. Chapter 1 illustrated Samuelson’s attempt at rationalizing PAYG within traditional theory as mimicking the mechanisms of a private old-age insurance. More realistically, Lerner put forward an interpretation of PAYG as a tax-transfer mechanism between coexisting generations. This approach does not deny that the consensus around PAYG depends on a quid pro quo structure by which each generation of contributors feels that its present sacrifice will be compensated in the future. Two dimensions of PAYG coexist: one infra-temporal and the other intertemporal. This is the light in which we interpreted the ‘insurance fiction’ and the notion of pensions as a ‘deferred wage’, as based on social beliefs or moral norms – in some cases embodied in written legislation – felt by the participants as a commitment of the community to fulfil what are perceived as acquired rights. In a PAYG scheme there are no real reserves to guarantee future...

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