A Non-Orthodox Analysis
Chapter 4: The Transition from PAYG to FF Schemes
* 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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