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Fostering Within-Family Human Capital Investment: An Intragenerational Insurance Perspective of Social Security

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  • Martin Barbie
  • Marcus Hagedorn
  • Ashok Kaul

Abstract

We propose an extended PAYG social security system that conditions pension benefits on the aggregate wage sum and on the wage of one’s children. The latter increases parents’ incentives to provide their children with good within-family education. However, since wages depend stochastically on parents’ unobservable investment in their children’s human capital, some insurance against the productivity risk of one’s children is provided because retirement income still depends on aggregate wages. We analyze the effects of such a social security system on the endogenous distribution of human capital and compare it to real world systems which typically do not condition benefits on the wages of one’s children. Our approach suggests a novel role for a well-designed social security system: it can foster human capital accumulation and act as an intra-generational insurance against productivity risk.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 236.

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Handle: RePEc:zur:iewwpx:236

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Keywords: Human Capital Formation; Social Security; Intragenerational Insurance; Heterogenous Households;

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References

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  1. James J. Heckman, 2000. "Policies to Foster Human Capital," JCPR Working Papers, Northwestern University/University of Chicago Joint Center for Poverty Research 154, Northwestern University/University of Chicago Joint Center for Poverty Research.
  2. Andrew B. Abel, 1999. "The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation," NBER Working Papers 6991, National Bureau of Economic Research, Inc.
  3. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
  4. Henning Bohn, 1999. "Social Security and Demographic Uncertainty: The Risk Sharing Properties of Alternative Policies," NBER Working Papers 7030, National Bureau of Economic Research, Inc.
  5. Enders, Walter & Lapan, Harvey E., 1982. "Social Security Taxation and Inter-Generational Risk Sharing," Staff General Research Papers, Iowa State University, Department of Economics 10822, Iowa State University, Department of Economics.
  6. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, Elsevier, vol. 37(2), pages 185-202, November.
  7. Bohn, Henning, 1998. "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series qt9r2809f0, Department of Economics, UC Santa Barbara.
  8. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, July.
  9. Sinn, Hans-Werner, 2004. "The pay-as-you-go pension system as fertility insurance and an enforcement device," Journal of Public Economics, Elsevier, Elsevier, vol. 88(7-8), pages 1335-1357, July.
  10. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  14. Smith, Alasdair, 1982. "Intergenerational transfers as social insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 19(1), pages 97-106, October.
  15. Martin Kolmar, 1997. "Intergenerational redistribution in a small open economy with endogenous fertility," Journal of Population Economics, Springer, Springer, vol. 10(3), pages 335-356.
  16. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  17. Demange, G. & Laroque, G., 1996. "Social Security and Demographic Shocks," DELTA Working Papers, DELTA (Ecole normale supérieure) 96-04, DELTA (Ecole normale supérieure).
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Cited by:
  1. Meier, Volker & Wrede, Matthias, 2010. "Pensions, fertility, and education," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 9(01), pages 75-93, January.

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