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Pay-as-you-go or funded social security? A general equilibrium comparison

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  • Kaganovich, Michael
  • Zilcha, Itzhak

Abstract

This paper demonstrates that the analysis of fiscal sustainability of social security must include the education funding dimension of public policy, which affects the productivity of future workers. This fact is true under both social security regimes: pay-as-you-go (PAYG) and fully funded (FF). We consider an OLG economy where the government, in addition to running social security, also funds education via a dedicated tax. The education tax rates are chosen, in each period, by a majoritarian rule. We demonstrate, contrary to conjectures in the literature, that the FF social security system produces political support for a relatively higher (compared to PAYG) education funding, and hence generates higher rates of human capital accumulation, physical capital accumulation, and economic growth, Furthermore, it also results in a comparatively lower degree of income inequality.

Suggested Citation

  • Kaganovich, Michael & Zilcha, Itzhak, 2012. "Pay-as-you-go or funded social security? A general equilibrium comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 455-467.
    • Handle: RePEc:eee:dyncon:v:36:y:2012:i:4:p:455-467
    DOI: 10.1016/j.jedc.2011.03.015
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    More about this item

    Keywords

    Social security; Human capital; OLG; Majority voting;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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