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Optimal intergenerational transfers: Public education and pensions

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  • Monisankar Bishnu
  • Shresth Garg
  • Tishara Garg
  • Tridip Ray

Abstract

In presence of imperfections in education loan market, the standard policy response of intervening solely on education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via pay-as-you-go pensions as a possible solution. But for various reasons sustainability of PAYG pensions is under serious doubt. We carry out the optimal policy exercise of a utilitarian government in a dynamically efficient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects or sociopolitical factors.

Suggested Citation

  • Monisankar Bishnu & Shresth Garg & Tishara Garg & Tridip Ray, 2020. "Optimal intergenerational transfers: Public education and pensions," CAMA Working Papers 2020-58, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2020-58
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    3. Torben M. Andersen & Joydeep Bhattacharya & Qing Liu, 2020. "Reference-Dependent Preferences, Time Inconsistency, and Unfunded Pensions," CESifo Working Paper Series 8260, CESifo.

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    Keywords

    Public education; PAYG pension; intergenerational transfers; welfare state;
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