The Economics of Pensions: a non Conventional Approach

This paper examines two alternative pension systems, pay-as-you-go (PAYGS) and the capitalisation system (CS) in the light of alternative economic theories. It starts from a critical discussion of the insurance- ction model of PAYGS proposed by Samuelson in 1958. The pros and cons of that model are illustrated by taking into consideration the non-orthodox views of Keynes, Lerner, Pechman, de Finetti and Eisner. Next, the paper investigates the relationship between CS and the marginalist capital theory. It is shown that, interpreted in a neoclassical framework, CS presents endogenous mechanisms of adjustment to demographic shocks. The problems of the transition between PAYGS and CS are then examined. The paper then discusses some main features of the current US policy debates on the Social Security system. Finally, the alleged advantages of a wider adoption of CS are criticised in the light of the Keynesian theory of effective demand reinforced by the Sraf an criticism of neoclassical capital theory.