The Intergenerational State: Education and Pensions

40 Pages Posted: 30 Apr 2002

See all articles by Michele Boldrin

Michele Boldrin

University of Minnesota - Twin Cities - Department of Economics; Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

Ana Montes

University of Murcia - Department of Economic Analysis

Date Written: March 2002

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

JEL Classification: H11, H30, H42, I20, O11

Suggested Citation

Boldrin, Michele and Montes, Ana, The Intergenerational State: Education and Pensions (March 2002). Available at SSRN: https://ssrn.com/abstract=308041

Michele Boldrin (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States
612-624-4551 (Phone)
612-624-0209 (Fax)

Universidad Carlos III de Madrid - Department of Economics

Calle Madrid 126
Getafe, 28903
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ana Montes

University of Murcia - Department of Economic Analysis ( email )

Campus de Espinardo
30100 Murcia
Spain
+34 968 36 3881 (Phone)

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