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

  • Michael Kaganovich
  • Volker Meier

    ()

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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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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  1. 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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  25. Gradstein, Mark & Kaganovich, Michael, 2003. "Aging Population and Education Finance," CEPR Discussion Papers 3950, C.E.P.R. Discussion Papers.
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