Public pensions and growth
AbstractThis paper investigates the relationship between the size of an unfunded public pension system and economic growth in an overlapping generation economy, in which altruistic parents finance the education of their children and leave bequests. Unlike the existing literature, we model intergenerational altruism by assuming that children's income during adulthood is an argument of parental utility. Unfunded public pensions can promote growth when families face liquidity constraints preventing them from investing optimally in the education of their children. We consider two alternative ways of financing a public pension system, either by levying social contributions in a lump-sum manner or in proportion to labour income. We find that there is no case for unfunded public pensions in economies where bequests are operative. By contrast, there exists a growth-maximising size of the public pension system in economies where bequests are not operative and individuals are sufficiently patient JEL Classification: H55, I20, D91
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0090.
Date of creation: Nov 2001
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Other versions of this item:
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- I20 - Health, Education, and Welfare - - Education - - - General
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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