FIAP > Featured Content > Xavier Sala I Martin commented on the inefficiency of the PAYGO systems.

Xavier Sala I Martin commented on the inefficiency of the PAYGO systems.

19 April, 2018

The renowned Catalonian economist commented on the inefficiency of the PAYGO systems.

The PAYGO pension system works like a pyramid scheme: Xavier Sala i Martin

  • One thing pyramid scammers have in common is that they all end up in jail, except if the scammers are part of the government, said Sala i Martin
  • He also pointed out that the returns of the PAYGO systems are very low because they depend solely on the growth of wages.
  • Colombia has to sort out its corruption issues, improve its infrastructure and invest in education.

Cartagena, April 13 2018. At closure of the 11th FIAP-Asofondos Congress, Professor Xavier Sala i Martin described the design and performance of the PAYGO systems, asserting that they work like a pyramid scheme in practice. According to the economist, the system operates that way because a broad base initially contributed for a few, but that base is disappearing, making the system unviable. “The time will come when all the money in the world will be used for paying the previous generation. Since this cannot be, there will always be a time when it is impossible to continue with the pyramid scheme,” he said.

He added: “All scams end up exploding: there comes a time when there is not enough money for paying the previous generation.”

Aware that we are in an electoral process, professor Sala i Martin warned political policymakers: “Politicians and votes decide on pension matters. In Spain, pensions will be cut back in real terms, based on a decision by Rajoy.”

And what does he recommend for Colombia?

The economist listed three fundamental pillars on which Colombia has to work for the economy to start growing again:

1) Institutions: the degree of corruption and the concentration of power are very alarming. This must be resolved.

Improve infrastructure

3) Education is a failure; Colombian students are significantly lagging compared to students in the rest of the world, and will not be able to deal with the fourth industrial revolution. On this issue, he mentioned that the educational base is not prepared to incorporate new technologies, because there is no money. And there is no money because the social security deficit is very high.

In conclusion, Xavier Sala i Martin posed the question “If the PAYGO system is so problematic, why do so many countries adopt it? Because politicians get immediate kickbacks.”

The economist said that it is important to explain to people that they are not necessarily being supportive if they defend the PAYGO system, adding that “The key is to generate the right incentives for people to save.”

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