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

Michael Kaganovich () and Volker Meier

No 2488, CESifo Working Paper Series from CESifo

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.

Keywords: pay-as-you-go pensions; social security; public education; growth; majority voting (search for similar items in EconPapers)
JEL-codes: D90 H23 H55 I28 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Social Security Systems, Human Capital, and Growth in a Small Open Economy (2012)
Working Paper: Social Security Systems, Human Capital, and Growth in a Small Open Economy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2488

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