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

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Author Info
Michael Kaganovich ()
Volker Meier ()

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Abstract

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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2488.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2488

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Related research
Keywords: pay-as-you-go pensions; social security; public education; growth; majority voting;

Find related papers by JEL classification:
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
I28 - Health, Education, and Welfare - - Education - - - Government Policy

References listed on IDEAS
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  1. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Blackwell Publishing, vol. 72(3), pages 651-664, 07. [Downloadable!] (restricted)
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  2. Panu Poutvaara, 2006. "On the political economy of social security and public education," Journal of Population Economics, Springer, vol. 19(2), pages 345-365, June. [Downloadable!] (restricted)
    Other versions:
  3. Casamatta, Georges & Cremer, Helmuth & Pestieau, Pierre, 2000. "The Political Economy of Social Security," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Jorge Soares, 2006. "A dynamic general equilibrium analysis of the political economy of public education," Journal of Population Economics, Springer, vol. 19(2), pages 367-389, June. [Downloadable!] (restricted)
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  5. Gradstein, Mark & Kaganovich, Michael, 2004. "Aging population and education finance," Journal of Public Economics, Elsevier, vol. 88(12), pages 2469-2485, December. [Downloadable!] (restricted)
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  6. Michele Boldrin, 2005. "Public Education and Capital Accumulation," Levine's Bibliography 172782000000000090, UCLA Department of Economics. [Downloadable!]
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  7. Konrad, Kai A, 1995. "Social Security and Strategic Inter-vivos Transfers of Social Capital," Journal of Population Economics, Springer, vol. 8(3), pages 315-26, August.
  8. Docquier, Frederic & Paddison, Oliver, 2003. "Social security benefit rules, growth and inequality," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 47-71, March. [Downloadable!] (restricted)
  9. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct. [Downloadable!] (restricted)
  10. Poterba, James M, 1998. "Demographic Change, Intergenerational Linkages, and Public Education," American Economic Review, American Economic Association, vol. 88(2), pages 315-20, May. [Downloadable!] (restricted)
  11. Conde-Ruiz, Jose Ignacio & Galasso, Vincenzo, 2005. "Positive arithmetic of the welfare state," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 933-955, June. [Downloadable!] (restricted)
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  12. Kaganovich, Michael & Zilcha, Itzhak, 1999. "Education, social security, and growth," Journal of Public Economics, Elsevier, vol. 71(2), pages 289-309, February. [Downloadable!] (restricted)
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  13. Glomm, Gerhard & Kaganovich, Michael, 2008. "Social security, public education and the growth-inequality relationship," European Economic Review, Elsevier, vol. 52(6), pages 1009-1034, August. [Downloadable!] (restricted)
  14. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November. [Downloadable!] (restricted)
  15. Kelvin R. Utendorf & Rowena A. Pecchenino, 1999. "Social security, social welfare and the aging population," Journal of Population Economics, Springer, vol. 12(4), pages 607-623. [Downloadable!] (restricted)
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  16. Alexander Kemnitz, 2000. "Social security, public education, and growth in a representative democracy," Journal of Population Economics, Springer, vol. 13(3), pages 443-462. [Downloadable!] (restricted)
  17. Lambrecht, Stephane & Michel, Philippe & Vidal, Jean-Pierre, 2005. "Public pensions and growth," European Economic Review, Elsevier, vol. 49(5), pages 1261-1281, July. [Downloadable!] (restricted)
    Other versions:
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