The Saving-Investment Nexus in the Debate on Pension Reforms

The saving-investment nexus is central to the pension debate, an important aspect of which concerns the impact of the different pension schemes, unfunded or funded, on economic growth. We shall consider two saving-led growth models. The dominant, neoclassical approach considers transferbased pay-as-you-go programmes (PAYG) as injurious to capital accumulation and favours the adoption of saving-based fully funded schemes (FF) that would instead encourage it. A second approach, based on a ‘classical growth model’, is also sympathetic to a FF reform by considering investment as determined by saving, presumably assuming the validity of Say’s Law at least in the long run. This view has recently sparked off some debate among non-orthodox economists. A third alternative approach (let us label this ‘classical-Keynesian’), based on the extension to the long period of the Keynesian postulate of the independence of investment from saving, regards PAYG as favourable (or at least neutral) with respect to accumulation, and any reform aimed at encouraging saving as detrimental to aggregate demand and growth. Section 9.2 will summarise some results of the attempt by a number of Sraffian economists to reinforce the implications of Keynes’s theory of effective demand for the explanation of accumulation (regarding the long period) in a direction that is, however, divergent from that taken by economists working in the tradition of the ‘Cambridge equation’. We shall also single out the nature of autonomous expenditure of PAYG transfers in the theory of effective demand. Section 9.3 will criticise the proposal of a wider adoption of a FF scheme based on the neoclassical growth model. We shall also consider the neoclassical saving-investment causality in the open economy, rebuking the mainstream argument that investment in southern countries is such as to ensure the profitability of a larger amount of old-age saving. Section 9.4 will rebut the feasibility of an analogous reform proposal advanced by Michl and Foley, based on a ‘classical’ growth model