Three Obstacles to the Transition from Unfunded to Funded Pension Schemes

Abstract

The paper examines the dominant views on the adoption of mandatory Fully Funded pension schemes (FF) as a partial or complete substitute for the unfunded PAYG. Three obstacles to the FF reform are envisaged. 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. Secondly, if PAYG's payroll contributions are reduced and diverted to an FF scheme, the larger private saving supply will be balanced by a lower government saving, if the government is committed to honouring the current pension payments. Thirdly, Keynes' saving paradox, reinforced by the capital theory critique initiated by Sraffa, suggests that the rise in the marginal propensity to save does not result in an increase in capital accumulation, but rather in a fall of income and employment.

Keywords: Social Security, Pensions, Privatisation

JEL Classification: H55, J26, J32, B51