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Pay-As-You-Go versus funded systems. Some critical considerations

By Eladio Febrero and Maria-Angeles Cadarso

Abstract

Longer life expectancy and lower fertility rates will lead to an ageing population in most Western countries. This is thought to make earnings-based defined-benefit pay-as-you-go pension schemes unviable in the near future. Some economists suggest shifting towards a capitalized funded system grounding their proposal on the following advantages: (i) it raises national saving, thus leading to a faster rate of accumulation and a larger per capita income; (ii) it offers a higher rate of return on savings; (iii) it is immune to demographic shifts. In this paper we explore the fundamentals of these advantages, and conclude that the theoretical basis supporting them is very weak. We base our theoretical standpoint on the Sraffian-based capital critique and the theory of endogenous money. Additionally, we defend a parametric reform of a standard PAYG using figures that correspond to the Spanish economy for the period 2001-70.

DOI identifier: 10.1080/09538250600797792
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