The Political intergenerational welfare state: A Unified framework

We provide a complete characterization of intergenerational welfare state with education and pension under probabilistic voting where voters internalize the general equilibrium effects materializing in their life-span. We show that as public education is introduced in the economy through the political process of voting, it always increases (reduces) the accumulation of human capital (physical capital), but strikingly, has no effect on the political equilibrium of PAYG social security tax. On the other hand, the introduction of a politically determined PAYG social security most defnitely reduces physical capital accumulation, however it will reduce the human capital accumulation if only if the public education is already present in the economy. Otherwise, it may lead to an increase in the human capital accumulation. We also demonstrate that the general equilibrium effects are crucial to sustain the social security program, and explain why the presence of PAYG social security may not provide su› cient incentive for public investment in education. Finally, we show that the simultaneous arrangement of public education and pension can increase the long-run growth if and only if the relative political weight of the old is small so that the pension program is thin, which makes the result of Boldrin and Montes (2005) study conditional on the intergenerational distribution of voting power in our political economy setup.