Journal
JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume 36, Issue 4, Pages 455-467Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jedc.2011.03.015
Keywords
Social security; Human capital; OLG; Majority voting
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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. (C) 2012 Elsevier B.V. All rights reserved.
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