The Aging of Population: Expenditure on Education and Social Security

Abstract

We analyze the effects of population aging on public expenditure when government is not fully efficient. We build an overlapping generations model in which government collects money from the households through a proportional tax on wages and distributes the resources in the form of pensions and a subsidy to education. The individual votes for the level of public assistance to receive in order to maximize her utility. We find that the solution of the model depends on the preferences of the median voter and that as population ages, more pensions are demanded in the economy relative to the subsidy to education, which makes the individuals invest less in the human capital formation of their children and lead economy to be less productive. We also demonstrate that government inefficiency plays a crucial role in the redistribution of resources and that the solution of such an inefficiency gap may slow down the negative e¤ects of population aging.