Unemployment, Public Pensions, and Capital Accumulation: Assessing Growth Effects of Alternative Funding Strategies

The paper develops an overlapping-generations model that interacts with a labor market characterized by equilibrium unemployment. This structure implies that young individuals can be in two different states, employed or unemployed. Hence, the social security system contains both old-age benefits and unemployment insurance. Including these features, the model seeks to assess growth effects of three different pension systems: one unfunded and two funded, where the distinction is made between actuarial and nonactuarial funding strategies. It is shown that both funded systems generate higher growth than an unfunded system. Moreover, the actuarial system fosters higher growth than the nonactuarial.