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Growth and Social Security: The Role of Human Capital

Alexander Kemnitz and Berthold U. Wigger

January 2000

DIPARTIMENTO DI SCIENZE ECONOMICHE - UNIVERSITÀ DEGLI STUDI DI SALERNO Via Ponte Don Melillo - 84084 FISCIANO (SA)

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Growth and Social Security: The Role of Human Capital

Alexander Kemnitz* and Berthold U. Wigger**

Abstract

This paper studies the growth and efficiency effects of pay-as-you-go financed social security when human capital is the engine of growth. Employing a variant of the Lucas (1988) model with overlapping generations, it is shown that a properly designed unfunded social security system leads to higher output growth than a fully funded one. Furthermore, the economy with unfunded social security is efficient while the other one is not. These results stand in sharp contrast to those that obtain in models where economic growth is driven by physical capital accumulation.

JEL classifications: H55, O41

Keywords: Endogenous Growth, Social Security, Human Capital

Acknowledgements: Financial support by the TMR Network Program is gratefully acknowledged

* University of Mannheim

Table of contents

1. Introduction

2. Laissez Faire and Efficient Allocations 3. An Economy with Pays-as-yu-go Pensions 4. Conclusions

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