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

Michael Kaganovich () and Itzhak Zilcha

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 4, 455-467

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.

Keywords: Social security; Human capital; OLG; Majority voting (search for similar items in EconPapers)
JEL-codes: D90 H53 H55 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:4:p:455-467

DOI: 10.1016/j.jedc.2011.03.015

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