The Intergenerational State: Education and Pensions

Michele Boldrin and Ana Montes ()

No 3275, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: When credit markets to finance investment in the human capital of young people are missing, the competitive equilibrium allocation is inefficient. When generations overlap, this failure can be mitigated by properly designed social institutions such as public education and public pensions. We show that, when established jointly, they implement an intergenerational transfer scheme supporting the complete market allocation. Through the public financing of education, the young borrow, from the middle age to invest in human capital. When employed, they pay back their debt via a social security tax, the proceedings of which finance pension payments to the now elderly lenders. We consider other, allocationally equivalent, financing schemes. In all cases, when the complete market allocation is achieved a certain equality should be observed among implicit rates of return and the market rate of return. We test this prediction by using micro and macro data from Spain. The results are, surprisingly, good. We also use the model to quantify the impact of undergoing demographic change on the implicit rates of return. The results point, unsurprisingly, to dramatic changes in generational rates of return. Contrary to what predicted by earlier studies in the generational accounting tradition, our findings suggest that future generations are not necessarily going to be worse than current ones.

Keywords: Public education; Public pensions; Efficient intergenerational arrangements (search for similar items in EconPapers)
JEL-codes: H11 H30 H42 I20 O11 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Related works:
Journal Article: The Intergenerational State Education and Pensions (2005)
Working Paper: The intergenerational state: education and pensions (2004)
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