Financing Pay-as-you-go Public Pension Systems

Some Notes in the Light of the Classical-type Theory of Income Distribution

Datos Bibliográficos

ID5813639
AutoresSergio Nisticò (0000-0003-4009-7911, Università degli studi di Cassino e del Lazio Meridionale, autor de correspondencia)
Año2013
Volumen25
Número3
Páginas426-443
Fecha de publicación2013-07-01
Peer ReviewedSí
Open AccessNo
TipoARTICLE
RevistaReview of Political Economy (JOURNAL)
Identificadores de la revistaISSN: 0953-8259 • E-ISSN: 1465-3982
EditorialTaylor & Francis (PUBLISHER • GB)
DOI10.1080/09538259.2013.807670
OpenAlexW2103696351
IdiomaEN
Citas recibidas1
Referencias citadas20

The paper uses a Sraffa-type two-sector model to study how the presence of retired workers interacts with the distribution of the surplus between workers and capitalists (firms). In particular, the paper investigates how the ongoing diminution of the ratio between active and retired workers affects the wage-profits-pensions frontier, which is defined after allowing that a social security tax, which reduces the claims of active workers and capitalists on the surplus of the economy, finances the pensions distributed each year to retired workers. Finally, it is argued that the different impact of defined-benefit and defined-contribution pay-as-you-go pension schemes depends on the actual incidence of payroll taxes. Notes 1Here we are concerned only with public pensions. We will not consider occupational or privately managed pay-as-you-go pension funds that can be classified as DB or DC according to whether the insurer (the employer) or the insured (the employee) bears the risk connected with the possibility that future economic and demographic conditions may differ markedly from those prevailing when the fund's rule were set. 2In fact, frontier Equation(11) is the section, plotted in Figure 2, of a surface in three-dimensional () space. 3According to the present trend in the distribution by age of the European population, if the average retirement age remains around 62, L/R is going to decrease from its actual level of 2.5 to roughly 1.4 in 2060. For a more comprehensive analysis of the forthcoming demographic scenario in Europe, see Wray Citation(2006) and European Union Citation(2011). 4Any new distributive set-up 'external' to would imply, implausibly, that either active or retired workers will be better off after the shock. 5Actually, many schemes, including the Social Security program in the United States, sometimes opted not to reduce the forced savings of workers when favorable demographics permitted that to be done, and chose instead to accumulate the monetary value of the surplus deriving from the upward shift and rotation of the frontier. The foreseen negative impact on net wages of the ongoing reduction of L/R could then be offset by the accumulated 'trust fund'. 6If the policy maker chooses to abandon the pure DB nature of the pension scheme not granting full protection to retirees, the target point could be any along the vertical segment and the actual set-up any corresponding point to the left of the target within the area of the triangle . 7Authors maintaining that these contributions weigh exclusively on wages include Brown Citation(1922), Meriam Citation(1933), Bauder Citation(1936), Hall Citation(1938) and Castellino Citation(1969). To be sure, there are also those who argue that the cost is transferred partly to prices as well as to wages: Harris Citation(1941), Kimmel Citation(1950), Break Citation(1953), Conrad Citation(1954), Dalton Citation(1954), Richardson Citation(1960). All categorically rule out any incidence on profit. Full incidence on wages is also confirmed by most empirical studies. See Brittain (Citation1971, Citation1972), Gruber & Krueger Citation(1991), Gruber (Citation1997, Citation2000). 8The proof that the constancy of the wage growth is not a necessary condition for the theorem to hold is given in Gronchi & Nisticò Citation(2008) within a clear-cut earnings-related framework that, realistically, allows for different retirement ages and career patterns. The first proofs of the theorem for a fully steady state can be found in Samuelson Citation(1958), Aaron (Citation1966) and De Finetti Citation(1956). Note that in Samuelson Citation(1958) the theorem is not explicitly proved in a defined-benefit context and that in Aaron (1966) the award formula is not properly related to individual earnings, in that the first annual benefit is equal to the average wage of active workers. 9Gronchi & Nisticò Citation(2008) give a proof for an economy with four overlapping generations and heterogeneous agents. The theorem establishes that the growth rate of the wage bill can be designated as the 'sustainable return' of an NDC pension scheme. 10The replacement rate is generally defined as the ratio between the first pension installment and the last wage. However, reference to the average of some end-of-career earnings rather than to earnings in the very last year of employment is a more reasonable measure of the adequacy of the initial pension to 'replace' the income earned during the active period. 11See also Bevilacqua Citation(2009). Notice that in equation Equation(12), the assumption has been made that the returns on the account balance are credited only up to year n − 1. 12Assuming that the rate of return yearly awarded on all account balances is the sustainable one, equation Equation(12) expresses a trade-off between the available wage (net of pension contributions) and the replacement rate. 13Such a clear-cut separation has recently been endorsed in Sweden, with the creation of a 'Pension Agency' autonomous from the 'Social Security Agency

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