RetirementSavingsAccountsandHumanCapitalInvestment.pdfVIP

Retirement Savings Accounts and Human Capital Investment Tetyana Dubovyky University of Minnesota and Federal Reserve Bank of Minneapolis November 30, 2006 ABSTRACT This paper studies the role of endogenous human capital accumulation in evaluating tax and Social Security policies. It considers two overlapping generations environments with borrowing constraints: one with exogenous human capital and a second with human capital accumulation through time investment. Baseline environments are calibrated to the U.S. tax and Social Security system. This paper analyzes two alternative Social Security systems: (a) voluntary and (b) mandatory retirement savings accounts. The paper Önds that the welfare ranking of these alternatives depends on the en- dogeneity of human capital investment. Both systems are welfare improving when compared to the baseline. However, the system with mandatory (voluntary) accounts leads to lower welfare gains in the endogenous (exogenous) human capital environment. This di§erence is due to young indi- viduals (i) switching time allocation towards human capital accumulation and (ii) being borrowing constrained under mandatory savings in the endogenous environment. I am grateful for insightful comments and suggestions by Ellen R. McGrattan, Timothy J. Kehoe, Edward C. Prescott, Zvi Eckstein, and participants of the International Trade and Growth Workshop at the University of Minnesota. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. yDepartment of Economics, University of Minnesota, 271 19th Ave South Suite 1035, Minneapolis, MN 55455, USA. E-mail: dubo