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

35 Pages Posted: 8 Dec 2008

See all articles by Michael Kaganovich

Michael Kaganovich

Indiana University Bloomington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Volker Meier

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Ifo Institute for Economic Research at the University of Munich

Date Written: December 2008

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

JEL Classification: D90, H23, H55, I28

Suggested Citation

Kaganovich, Michael and Meier, Volker, Social Security Systems, Human Capital, and Growth in a Small Open Economy (December 2008). CESifo Working Paper Series No. 2488, Available at SSRN: https://ssrn.com/abstract=1313033 or http://dx.doi.org/10.2139/ssrn.1313033

Michael Kaganovich

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Volker Meier (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Ifo Institute for Economic Research at the University of Munich ( email )

Poschingerstr. 5
Munich
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
86
Abstract Views
663
rank
399,029
PlumX Metrics