Education subsidies, social security and growth: The implications of a demographic shock

We develop a three-period overlapping-generations model in which individual decisions about education are the engine of growth. In this setting, we in vestigate the normative role of education subsidies and old age pensions. C alibrating this model on empirical data, it is shown that the case for posi tive pension benefits is rather weak on the optimal path. An important part of education subsidies should be financed by lump-film taxes on retirees. We also examine how these transfers should be adjusted in the presence of a baby boom-baby bust demographic shock. It turns out that an appropriate po licy could be to increase education when the baby-boom generation is at wor k. Labor productivity will then be higher when aging peaks so that the pens ion bill can be financed without reducing welfare for the baby-bust generat ions. JEL classification: O41; J24; E62.