Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26533
Authors: 
Kaganovich, Michael
Meier, Volker
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2488
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.
Subjects: 
Pay-as-you-go pensions
social security
public education
growth
majority voting
JEL: 
D90
H23
H55
I28
Document Type: 
Working Paper

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