The Intergenerational Welfare State and the Rise and Fall of Pay-as-You-Go Pensions

38 Pages Posted: 28 Aug 2015

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Joydeep Bhattacharya

Iowa State University - Department of Economics

Date Written: January 11, 2015

Abstract

This paper develops a theory of the two-armed intergenerational welfare state, consistent with key features of modern welfare arrangements, and uses it to rationalise the rise and fall in generosity of pay-as-you-go pensions solely on efficiency grounds. By using the education arm, a dynamically-efficient welfare state is shown to improve upon long-run laissez faire even when market failures are absent. To release these downstream welfare gains without hurting any transitional generation, help from the pension arm is needed. In the presence of an intergenerational education externality, pensions initially rise in generosity but can be replaced by fully funded pensions eventually.

Keywords: public education, Pareto improvements, overlapping-generations models

JEL Classification: D91, E21, O41

Suggested Citation

Andersen, Torben M. and Bhattacharya, Joydeep, The Intergenerational Welfare State and the Rise and Fall of Pay-as-You-Go Pensions (January 11, 2015). Available at SSRN: https://ssrn.com/abstract=2651160 or http://dx.doi.org/10.2139/ssrn.2651160

Torben M. Andersen

University of Aarhus - Department of Economics ( email )

University Park
Building 322
DK-8000 Aarhus C
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+45 8 942 1609 (Phone)
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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

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