Education, social security, and growth

We study the role of government's allocation of tax revenues between two outlays: public investment in education (a transfer to the young generation) and social security benefits to the older generation. In an overlapping generations economy with pay-as-you-go social security and altruistically motivated transfers from parents to children, we analyze how the allocation of the tax revenues between the two outlays affects growth and welfare in competitive equilibria: (a) we obtain comparative dynamics results for nonstationary equilibria subject to a change in the allocation profile; (b) for stationary equilibria we show that for a given allocation profile of the tax revenues, educational subsidies can either increase the growth rate or decrease it depending on the parameters of the model (preferences, production function and the tax rate); (c) if government seeks to allocate funds in a way that maximizes the growth rate, we demonstrate that under some plausible conditions it is not optimal to maintain pay-as-you-go social security; however, if parents' preferences combine strong concern for their retirement with significant degree of altruism towards their children, then pay-as-you-go social security system does enhance growth and welfare. (C) 1999 Elsevier Science S.A. All rights reserved.