Topic 3: Social Contracts and Pension Design
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Learning Objectives
At the end of this topic, you should be able to answer these questions:
- How is value created through co-operation shared under
- Classical rationality
- Bounded rationality
- Ecological rationality
- What are social contracts?
- What is the relationship between national pension system design or the five pillars framework of pensions and social contract?
- What are the sources of variation in national pension system design?
A harmonious society creates value through cooperation and devises arrangements for how it is shared. Division of labor and the process of specialization in a society creates a growing mutual dependence among its constituent individuals and groups. Humans are social beings; hence this mutual dependence is not just economic but also psychological and social. The value that is created through our co-operative relationships is greater than the arithmetic sum of the value created through our individual efforts. The enhanced value created through co-operation requires the setting up of rules of sharing that is considered ‘fair’ by the co-operating groups. The perception of ‘fairness’ is a prerequisite for the sustainability of co-operating relationships in a society. Plato, in his book The Republic, noted that concepts of justice and injustice emerge when we enter into this arrangement of mutual interdependence. Social justice requires “giving every man his due.” However, determining what ‘every man’s due’, poses a challenge in operationalizing and implementation.
Social Contracts
A social contract is an implicit contract between members of a society that lays down the terms of co-operation and ‘fair’ sharing of the value created. In the next few paragraphs we will examine how the different interpretations of rationality allocate the ‘fair’ share of value created through co-operation.
Classical & Bounded Rationality
In the topic on intertemporal choice we learnt about three interpretations of human rationality. Classical & Bounded rationality with their focus on pursuit of self-interest and ecological rationality as the other view with its focus on collective survival or well being are two perspectives of decision-making behavior. Both these perspectives can be applied to the sharing of value created through cooperation in social contracts. Li and Tracer (2017), in their comprehensive survey of the literature on decision-making behavior, makes a distinction between “selfishness axiom” which underpins classical and bounded rationality and pro social decision behavior that forms the basis of ecological rationality .
Proponents of the selfishness axiom take an individualistic perspective on survival and argue that in the quest for survival and reproductive success “individuals are expected to behave in their own selfish interests” (Krebs & Davis, 1981, p.22). Similar sentiments are expressed by Richard Dawkins (1976) in his book, the Selfish Gene. With its focus