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

  • Kaganovich, Michael
  • Meier, Volker

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 pay-as-you-go (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. 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. 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 a coalition of older individuals and lower income workers.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19536.

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Date of creation: 2012
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Publication status: Published in Journal of Public Economic Theory 4 14(2012): pp. 573-600
Handle: RePEc:lmu:muenar:19536
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  1. Michele Boldrin, 2005. "Public Education and Capital Accumulation," Levine's Bibliography 172782000000000090, UCLA Department of Economics.
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  13. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-88, September.
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  25. repec:wop:bodewp:218 is not listed on IDEAS
  26. Yvonne Adema & Lex Meijdam & Harrie Verbon, 2008. "Beggar thy thrifty neighbour," Journal of Population Economics, Springer, vol. 21(4), pages 933-959, October.
  27. Michael Kaganovich & Itzhak Zilcha, 2008. "Alternative Social Security Systems andGrowth," CESifo Working Paper Series 2353, CESifo Group Munich.
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