Funded Pensions, Labor Market Participation, and Economic Growth

This paper analyses a model of overlapping generations in which agents who do not participate in the labor market are unable to borrow. Thus an increase in a fully funded pension raises aggregate savings even with a fixed participation rate, since private savings are not crowded out one-for-one. When labor force participation is determined endogenously, a rise in the level of fully funded pensions increases aggregate employment. This rise in employment augments growth, directly by raising per capita savings and indirectly by affecting tax and interest rates. 1 This paper is part of the research project, "Social security initiatives and economic growth", which is financed by the ESRC under the Evolving Macroeconomy Programme. The authors would like to thank the Economic Policy Research Unit at the University of Copenhagen for the hospitality that made part of this research possible. They also thank two anonymous referees, the editor, and seminar participants at the 2000 Manchester Conference on Growth and Business Cycles and at The Ohio State University for comments on earlier drafts. The authors will gladly make available the Gauss programs and the data that were used in the simulations described below. Address for correspondence: Mark A. Roberts, School of Economics, University of Nottingham, University Park, Nottingham, NG7 2RD. UK. Fax: +44 1159 514159. Email: [email protected] 1