Do Pensions Foster Education? An Empirical Perspective

Abstract

In this paper we examine the effect of the demographic transition on public education, pension spending and the interaction between them. In particular, we investigate the theoretical prediction that the structure of PAYG pension systems, alongside population ageing, offers incentives for the working-age generation to invest in the public education of the young in order to "reap" the benefits of their higher productivity in the future, translated into higher income tax/contributions. The empirical evidence resulting from the application of the fixed effects approach to panel data for OECD countries shows that the increasing share of elderly people has non-linear effects on both retirement and education spending. The former suggests that political pressure to increase benefits turns out to have no effect when the ageing process is strong enough to compromise the fiscal budget and the latter indicates a certain degree of generational conflict. Nevertheless, our results suggest that a positive link arises when examining the connection between education and pensions by using the projected old dependency ratio. A more detailed analysis of total education expenditure shows that only the non-mandatory educational levels benefit from the future population ageing.

Keywords: Public Finance, Population ageing, Education, Pension Politics, PAYG, Macroeconomics

JEL Classification: H52, H53, H55, I22, J11