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

Michael Kaganovich*, Itzhak Zilcha

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)455-467
Number of pages13
JournalJournal of Economic Dynamics and Control
Volume36
Issue number4
DOIs
StatePublished - Apr 2012

Funding

FundersFunder number
Institute for Advanced Study, University of Minnesota
Tel Aviv University

    Keywords

    • Human capital
    • Majority voting
    • OLG
    • Social security

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