TY - JOUR
T1 - Pay-as-you-go or funded social security? A general equilibrium comparison
AU - Kaganovich, Michael
AU - Zilcha, Itzhak
N1 - Funding Information:
We are grateful to Gerhard Glomm, Volker Meier, Paul Klein, an anonymous referee, as well as the conference participants at the 2007 European Meetings of the Econometric Society and PET 2007 for helpful comments and suggestions. We are grateful for the support from the Pinhas Sapir Center for Development, Tel Aviv University , and Indiana University Institute for Advanced Study .
PY - 2012/4
Y1 - 2012/4
N2 - 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.
AB - 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.
KW - Human capital
KW - Majority voting
KW - OLG
KW - Social security
UR - http://www.scopus.com/inward/record.url?scp=84856735107&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2011.03.015
DO - 10.1016/j.jedc.2011.03.015
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AN - SCOPUS:84856735107
SN - 0165-1889
VL - 36
SP - 455
EP - 467
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 4
ER -
