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Social Security Systems, Human Capital, and Growth in a Small Open Economy

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  • Michael Kaganovich
  • Volker Meier

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Abstract

We consider a small open economy in which the level of public education funding is determined by popular vote. We show that growth can be enhanced by the introduction of pay-as-you-go pensions even if the growth rate of aggregate wages falls short of the interest rate. The reason is that the PAYG system allows future retirees to partially internalize positive externalities of public education due to the positive effect of higher future labor productivity on their pension benefits. The majority support for education funding will be especially strong when the PAYG benefit formula is flat, i.e. progressively redistributive. This means that if a flat benefit PAYG pension system is in place then the economy will achieve the highest growth rate relative to the alternative pension system designs. We argue furthermore that while such PAYG pension system may be opposed by the majority of working individuals due to inferior returns to their pension contributions relative to a funded scheme, it is likely to be politically sustained by the coalition of retirees and lower income workers.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2488.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2488

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Keywords: pay-as-you-go pensions; social security; public education; growth; majority voting;

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References

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  1. Panu Poutvaara, 2006. "On the political economy of social security and public education," Journal of Population Economics, Springer, vol. 19(2), pages 345-365, June.
  2. Iñigo Iturbe Ormaetxe & Guadalupe Valera, 2004. "Social Security Reform And The Support For Public Education," Working Papers. Serie AD 2004-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Glomm, Gerhard & Kaganovich, Michael, 2008. "Social security, public education and the growth-inequality relationship," European Economic Review, Elsevier, vol. 52(6), pages 1009-1034, August.
  4. Boldrin, Michele, 2005. "Public education and capital accumulation," Research in Economics, Elsevier, vol. 59(2), pages 85-109, June.
  5. Poterba, James M, 1998. "Demographic Change, Intergenerational Linkages, and Public Education," American Economic Review, American Economic Association, vol. 88(2), pages 315-20, May.
  6. 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.
  7. Conde-Ruiz, José Ignacio & Galasso, Vincenzo, 1999. "Positive Arithmetic of the Welfare State," CEPR Discussion Papers 2202, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Tim Buyse & Freddy Heylen & Renaat Van de Kerckhove, 2013. "Pension reform, employment by age, and long-run growth," Journal of Population Economics, Springer, vol. 26(2), pages 769-809, April.
  2. Tetsuo Ono, 2013. "Public Education and Social Security: A Political Economy Approach," Discussion Papers in Economics and Business 13-06-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. T. Buyse & F. Heylen & R. Van De Kerckhove, 2012. "Pension reform in an OLG model with heterogeneous abilities," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/810, Ghent University, Faculty of Economics and Business Administration.
  4. T. Buyse & F. Heylen & R. Van De Kerckhove, 2011. "Pension reform, employment by age, and long-run growth in OECD countries," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/719, Ghent University, Faculty of Economics and Business Administration.
  5. Tetsuo Ono, 2014. "Economic Growth and the Politics of Intergenerational Redistribution," Discussion Papers in Economics and Business 14-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  6. Tetsuo Ono, 2013. "Public Education and Social Security: A Political Economy Approach," Discussion Papers in Economics and Business 13-06, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Iñigo Iturbe Ormaetxe & Guadalupe Valera, 2004. "Social Security Reform And The Support For Public Education," Working Papers. Serie AD 2004-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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