Social security benefit rules, growth and inequality

Abstract

We examine the balanced growth effects of pension plans on the rate of growth and on income dispersion in a closed economy where individual decisions about education are the engine of growth. We distinguish between pay-as-you-go and fully funded pension systems and differentiate between three different benefit rules: a Beveridgean regime, a Bismarckian regime depending on one's entire earnings history and on one's partial earnings history. Our analysis shows that social security generally reduces the long-run growth rate and our inequality measure. Growth can only be stimulated under a fully funded scheme based on partial earnings history. © 2003 Elsevier Science Inc. All rights reserved.