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Are PAYG and FF Pension Schemes Equivalent Systems? Macroeconomic Considerations in the Light of Alternative Economic Theories

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  • Sergio Cesaratto

Abstract

Conventional wisdom holds that Fully Funded (FF) pension schemes would better prepare the community for ongoing demographic change. Many critics of FF schemes argue that these plans would encounter problems similar to those that create financial difficulties to Pay-As-You-Go (PAYG) schemes. More specifically, they maintain that, whereas in a PAYG scheme a decrease in the working population with respect to an increasing elderly population undermines the financial source of pension transfers, by the same token in an FF scheme a diminished number of young savers would make the absorption of the capital assets accumulated by the pension funds difficult. This paper assesses the mainstream claim and its criticism in the light of the neoclassical foundations of the dominant view. It will emerge that the criticism is partially correct, but we arrive at this conclusion through reasoning that does not bypass the theoretical foundations of the mainstream claim. The capital theory critique is shown to be relevant in this respect.

Suggested Citation

  • Sergio Cesaratto, 2007. "Are PAYG and FF Pension Schemes Equivalent Systems? Macroeconomic Considerations in the Light of Alternative Economic Theories," Review of Political Economy, Taylor & Francis Journals, vol. 19(4), pages 449-473.
    • Handle: RePEc:taf:revpoe:v:19:y:2007:i:4:p:449-473
    DOI: 10.1080/09538250701622287
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    References listed on IDEAS

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    1. Philipp C. Rother & Marco Catenaro & Gerhard Schwab, 2004. "Aging and Pensions in the Euro Area," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 593-593, December.
    2. Sergio Cesaratto, 2005. "Pension Reform and Economic Theory," Books, Edward Elgar Publishing, number 2081.
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    Cited by:

    1. Sergio Cesaratto, 2008. "The Macroeconomics of the Pension Fund Reform and the case of the TFR reform in Italy," Department of Economics University of Siena 549, Department of Economics, University of Siena.
    2. Codrina Rada, 2012. "The Economics of Pensions. Remarks on Growth, Distribution and Class Conflict," Working Paper Series, Department of Economics, University of Utah 2012_02, University of Utah, Department of Economics.
    3. Sergio Cesaratto, 2013. "The implications of TARGET2 in the European balance of payments crisis and beyond," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 10(3), pages 359-382.
    4. Teresa Ghilarducci & Karthik Manickam, 2023. "A Critical Survey of Pension Provision And Pension Reform," SCEPA working paper series. 2023-04, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    5. Sergio Cesaratto, 2011. "The macroeconomics of pension reform: The case of severance pay reform in Italy," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 8(1), pages 69-89.

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