Resource title

Social security systems, human capital, and growth in a small open economy

Resource image

image for OpenScout resource :: Social security systems, human capital, and growth in a small open economy

Resource description

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.

Resource author

Michael Kaganovich, Volker Meier

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26533

Resource license

Adapt according to the presented license agreement and reference the original author.