Investment in children, social security, and intragenerational risk sharing

We analyze the role of pay-as-you-go social security in intragenerational risk sharing in an overlapping-generations model with individual heterogeneity. Parents invest in their children’s education in exchange for old-age support financed by a fraction of their children’s future earnings. Due to random factors such as luck in the job market, children may have different earning capacities even if they receive the same education. Without social security, a parent receives a transfert payment from her own child, so the received amount is uncertain as it depends on the child’s earnings. The social security scheme of pooling transfer contributions from all children and then returning them equally to each parent insures parents against the riks of educational investments. Our models shows that social security stimulates educational spending, increases labor earnings, and improves social welfare (as measured by ex ante individual utility). However, it worsens ex post intragenerational income equality (as measured by the Gini coefficient for lifetime income).