GLOBAL - Adair Turner, the chairman of the UK's Pensions Commission, has likened pay-as-you-go pension systems to pyramid selling schemes.
He also suggested that people's "inertia and myopia" mean that free market pensions are untenable.
Seeking to explain the demographic challenges facing pension systems around the world, Turner says the problem is not so much increased longevity but falling fertility - which means there are fewer people coming in to the system to pay pensions.
"All 20th century PAYG pension systems were in a sense ‘ponzi schemes', or pyramid selling schemes: for the mathematics of the relationship between contributions paid in and pensions paid out to work, there must be more people in the next link in the chain, the next generation," Turner notes in an article for the International Monetary Fund.
"And the population pyramids are coming to an end," the Merrill Lynch Europe vice chairman adds.
Turning to the UK, he argues that the country can have a clearly sustainable state pensions policy - and that its potential problem is not a fiscally constrained state but poor pensioners.
The Pensions Commission's automatic enrolment proposal would "overcome the barriers of inertia and myopia that make an entirely free market approach to pension savings untenable".
He cited reforms in Sweden, which show the PAYG system "can be made robust in the face of uncertainty over both future longevity and future fertility" via the introduction of a notional defined contribution approach.
The only advantage of funded systems was that they allowed for the "expression of diverse individual utility preferences between different combinations of risk and return".
Conversely, PAYG systems had the inherent advantage of very low administrative costs.
"As a result, the choice of a balance between PAYG and funded elements of the system, and thus the appropriate generosity of the PAYG system, needs to reflect a country's political culture and, in particular, the acceptability of different levels of taxation and compulsory contribution."
The comments appear in the IMF's quarterly Finance and Development publication.