| This paper first examines the overlapping generations model by Kemnitz and Wigger (2000). It is shown that an economy without an unfunded pension system is away from Pareto-efficiency because of the externality in the production of human capital. The human capital investment is not sufficient for the optimal allocation which stunts the economic growth. But with the introduction of an appropriately designed social security program, the inefficiency can be corrected. Human capital accumulation will increase and the economy will grow faster. Then an Altruism variable is incorporated into the model. It is further shown that even with this variable, human capital accumulation is insufficient to take care of the externality. The decentralized competitive allocation is still different from social planner's. A proper unfunded social security can be used to help the economy reach efficiency. Furthermore, in the case of U.S.' Pay-As-You-Go pension system, an optimal tax rate is calculated. In the last part, another type of altruism is suggested as extension for further research. |
