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

  • Martin Barbie
  • Marcus Hagedorn
  • Ashok Kaul

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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  18. Enders, Walter & Lapan, Harvey E, 1982. "Social Security Taxation and Intergenerational Risk Sharing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 647-58, October.
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