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Cambridge Journal of Economics Advance Access originally published online on May 3, 2005
Cambridge Journal of Economics 2006 30(1):33-48; doi:10.1093/cje/bei046
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Right arrow B51 - Socialist; Marxian; Sraffian
Right arrow E21 - Consumption; Saving; Wealth
Right arrow H55 - Social Security and Public Pensions
Right arrow J14 - Economics of the Elderly; Economics of the Handicapped
Right arrow J26 - Retirement; Retirement Policies
Right arrow J32 - Nonwage Labor Costs and Benefits; Private Pensions
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© The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Article

Transition to fully funded pension schemes: a non-orthodox criticism

Sergio Cesaratto*

* Università di Siena

Address for correspondence: Dipartimento di Economia Politica, Piazza San Francesco 7, 53100 Siena, Italy; email: Cesaratto{at}unisi.it

Abstract

The paper critically examines the dominant neoclassical views on the adoption of mandatory Fully Funded (FF) pension schemes as a partial or complete substitute for the unfunded Pay-as-you-go (PAYG) type. According to this view, such a transition will have the positive real effect of endowing future generations with higher capital and output per head, since it should cause a once and for all increase in aggregate saving and the capital stock. This would prepare the economy for future demographic developments. We examine three obstacles to such a claim. To begin with, the reform may fail to boost workers' marginal propensity to save, since workers may contract their voluntary saving to compensate for the larger mandatory saving to FF schemes. Second, if PAYG's payroll contributions are reduced and diverted to Pension Funds, the larger private saving supply will be balanced by lower government saving, if the government is committed to honouring the current pension payments. Third, Keynes's saving paradox, reinforced by the capital theory critique inspired by Sraffa, shows that the rise in the marginal propensity to save does not result in an increase in capital accumulation, but rather in a fall in income and employment.

Key Words: Social Security • Pensions • Privatisation • Capital theory • Sraffian economics

JEL classifications: H55, J26, J32, B51

Manuscript received July 11, 2003; final version received May 18, 2004.


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T. R. Michl
Comments on Cesaratto's 'Transition to fully funded pension schemes: a non-orthodox criticism'
Camb. J. Econ., November 1, 2006; 30(6): 981 - 984.
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 Cambridge J EconHome page
S. Cesaratto
A reply to Michl
Camb. J. Econ., November 1, 2006; 30(6): 985 - 987.
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