Optimal intergenerational transfers: Public education and pensions

Abstract

In presence of imperfections in education loan market, the standard policy response of intervening solely on education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via payas-you-go pensions as a possible solution. But for various reasons sustainability of PAYG pensions is under serious doubt. We carry out the optimal policy exercise of a utilitarian government in a dynamically efficient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects or sociopolitical factors.

Pension, possible phaseout, and endogenous fertility in general equilibrium

“…Our proposed child subsidy as a part of the correcting mechanism goes well with the observed child-friendly policies in some countries. We would like to mention here that the phaseout of pensions in our paper does not follow an "inverted U" pattern as is observed in Andersen and Bhattacharya (2017) or Bishnu et al (2021) representing the rise and fall of pensions over time. In other words, both the rise and fall of pensions may not be rationalized in the present analysis if just the fertility externality is used to phase pensions out.…”

“…generation is worse off. Apart from a rich set of works (some of which we have cited above), two recent papers that are somewhat similar to this study in the spirit of phasing out PAYG pensions are Andersen and Bhattacharya (2017) and Bishnu et al (2021). Unlike the present paper, both of them have exogenous fertility as well as exogenous factor prices.…”

Human capital and pensions with endogenous fertility and retirement

“…In particular, with respect to our approach they suppose a sequence of myopic social planners who maximize the utility of those alive. Andersen and Bhattacharya (2017) and Bishnu et al (2021) focus on efficient allocations in models with both human capital and pensions but they abstract from endogenous fertility.…”