The political intergenerational welfare state

Abstract

This paper characterizes an intergenerational welfare state with endogenous education and pension choice under general equilibrium-probabilistic voting. We show that politically implementing public education program always increases the future human capital, but this higher future human capital would not help support a more generous social security in the future. The effect of implementing PAYG social security on education however crucially depends on the sources of funding for education investment. Establishing PAYG pension program depresses investment in public education. However if the source of funding for education investment is private, in both the cases when pension is the only instrument or when public pension and public education are implemented together as a package, there can be an improvement in education investment if and only if the political influence of the old is limited and so the size of the PAYG social security is small. A substantially thick pension scheme which results from a heavy influence of the old in the political process spoils the mutual benefits. Abstract This paper characterizes an intergenerational welfare state with endogenous education and pension choice under general equilibrium-probabilistic voting. We show that politically implementing public education program always increases the future human capital, but this higher future human capital would not help support a more generous social security in the future. The e¤ect of implementing PAYG social security on education however crucially depends on the sources of funding for education investment. Establishing PAYG pension program depresses investment in public education. However if the source of funding for education investment is private, in both the cases when pension is the only instrument or when public pension and public education are implemented together as a package, there can be an improvement in education investment if and only if the political in ‡uence of the old is limited and so the size of the PAYG social security is small. A substantially thick pension scheme which results from a heavy in ‡uence of the old in the political process spoils the mutual bene…ts.

Pensions, education, and growth: A positive analysis

“…The feedback mechanism is demonstrated by Beauchemin (1998), Forni (2005), Bassetto (2008), Gonzalez-Eiras and Niepelt (2008, 2012), Song (2011), Bishnu and Wang (2014), Chen and Song (2014), and Ono (2015). In particular, the present study is closely related to Lancia and Russo (2015), who analyze the politics of public education and pensions in overlapping generations models.…”

“…where the …rst line comes from the capital market clearing condition, (1 + n)k 0 h 0 = s with the saving function in (1), and the second line comes from the pro…t maximization conditions in (3) and (4) and the conjecture of the policy function p 0 in (8). After rearranging the terms, we rewrite the abovementioned expression as follows:…”

Intergenerational debt dynamics without tears

“…The issue of integenerational conflict due to timing differences between costs and benefits therefore cannot arise in an infinitely-lived agent framework. And it is precisely this conflict that makes debt dynamics worthy of attention in our setup 7. In a sense, the paper proves the existence of the economic equivalent of a perpetual-motion machine: a nation borrows from its own people to fuel a higher level of long-run prosperity and eventually retires that debt without sacrificing anyone's happiness -no tears -along the way.…”

“…Starting from a laissez-faire steady state, it is possible for the government to implement an incremental debt-financed, public education scheme that generates more human capital and higher welfare in the long run relative to laissez faire, and most importantly, along the trajectory no transitional generation is harmed relative to laissez faire; additionally, the path of debt does not explode. 7 Sufficient conditions for this local result to hold are reasonable: if the LF steady state is locally stable, the policy perturbation is incremental, and public debt increases on policy impact, then debt levels will fall right away for any dynamically-efficient economy with a human capital externality, even when private and public education are perfect substitutes. Our insistence that debt levels go to zero over time has an important implication.…”

Intergenerational transfers, demographic transition, and altruism: Problems in developing Asia

“…The authors postulate that, by implicit family contracts, elderly parents are entitled to receive support from their children proportional to their past education investments. In the public choice literature, Bishnu and Wang (2017) suggest that more than half of voters in the OECD countries will be 61 or older by the year 2050. This will surely affect the intergenerational distribution of public spending in the future.…”