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Alternative Social Security Systems andGrowth

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  • Michael Kaganovich
  • Itzhak Zilcha

Abstract

Demographic trends in most developed economies are characterized by rising longevity and decreasing birthrates. These trends endanger the sustainability of the current public pension systems. Therefore social security reform proposals are on the agenda in many countries. This paper demonstrates that the analysis of fiscal sustainability of social security must include an additional dimension of public policy, namely education funding. Indeed, the productivity growth of future workers, which depends on human capital accumulation, may outweigh the impact of the demographic problem. This fact is true under both pay-as-you-go (PAYG) and fully funded (FF) social security system. We consider an OLG economy where government, in addition to running social security, also funds education of future workers by means of taxes collected from the current ones. The education tax rates are chosen, in each period, by a majoritarian rule among the relevant constituents. We demonstrate that while the FF system results in relatively higher rates of physical capital accumulation, then under some conditions, other things equal, the PAYG social security regime leads to the choice of relatively higher respective levels of education tax rates in all generations, and thereby to higher rates of human capital accumulation.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-07/cesifo1_wp2353.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2353.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2353

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Keywords: social security; funding; growth; human capital;

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References

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  1. Lambrecht, Stéphane & Michel, Philippe & Vidal, Jean-Pierre, 2001. "Public pensions and growth," Working Paper Series 0090, European Central Bank.
  2. Gerhard Glomm & Michael Kaganovich, 2003. "Distributional Effects of Public Education in an Economy with Public Pensions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 917-937, 08.
  3. Kaganovich, M & Zilcha, I, 1997. "Education, Social Security and Growth," Papers 1-97, Tel Aviv.
  4. Poutvaara, Panu, 2006. "On the political economy of social security and public education," Munich Reprints in Economics 19551, University of Munich, Department of Economics.
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  8. Karni, Edi & Zilcha, Itzhak, 1989. "Aggregate and distributional effects of fair social security," Journal of Public Economics, Elsevier, vol. 40(1), pages 37-56, October.
  9. Jorge Soares, 2005. "A Dynamic General Equilibrium Analysis of the Political Economy of Public Education," Working Papers 05-05, University of Delaware, Department of Economics.
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  11. Marko Kothenbürger & Panu Poutvaara, 2006. "Social Security Reform and Investment in Education: Is There Scope for a Pareto Improvement?," Economica, London School of Economics and Political Science, vol. 73(290), pages 299-319, 05.
  12. Gradstein, Mark & Kaganovich, Michael, 2003. "Aging Population and Education Finance," CEPR Discussion Papers 3950, C.E.P.R. Discussion Papers.
  13. Junsen Zhang & Junxi Zhang, 1998. "Social Security, Intergenerational Transfers, and Endogenous Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1225-1241, November.
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  17. James R. Hines Jr. & Timothy Taylor, 2005. "Shortfalls in the Long Run: Predictions about the Social Security Trust Fund," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 3-9, Spring.
  18. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  19. Alexander Kemnitz, 2000. "Social security, public education, and growth in a representative democracy," Journal of Population Economics, Springer, vol. 13(3), pages 443-462.
  20. Nelson, Phillip, 1999. " Redistribution and the Income of the Median Voter," Public Choice, Springer, vol. 98(1-2), pages 187-94, January.
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Citations

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Cited by:
  1. Michael Kaganovich & Volker Meier, 2012. "Social Security Systems, Human Capital, and Growth in a Small Open Economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(4), pages 573-600, 08.
  2. Kunze, Lars, 2012. "Funded social security and economic growth," Economics Letters, Elsevier, vol. 115(2), pages 180-183.
  3. Kaganovich, Michael & Zilcha, Itzhak, 2012. "Pay-as-you-go or funded social security? A general equilibrium comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 455-467.

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