Aging Population and Education Finance Under Endogenous Migration

This paper explores the potential impact of population aging trends on support for the financing of public education using an applied theoretical approach. As demographic projections anticipate significant increases in the relative share of elderly individuals in the population, the question of how age distribution in a population effects support for public goods such as education becomes increasingly significant. Conventional wisdom suggests that an upward shift in age distribution – increasing the share of elderly individuals relative to workers – will result in decreased support for public education due to elderly individuals’ lack of utility from investments in future productivity. This paper demonstrates that such conventional wisdom does not hold in a simple two-district overlapping generations model and shows that an increasing share of elderly individuals in the population may result in increased levels of funding for education due to changes in a district’s tax base.

The model developed in this paper builds on the work of Mark Gradstein and Michael Kaganovich who demonstrated that while increasing longevity in a two-generation OLG model with two municipal districts creates a downward pressure on tax rates, this effect is dominated by changing political incentives among workers. This paper expands upon the Gradstein-Kaganovich model by introducing endogenous migration rates between districts in the model in order to reflect households’ incentives to minimize tax burden in retirement. It can be shown that as consumers’ responsiveness to differences in tax rates increases, the difference in education funding levels between districts decreases despite the difference in the relative share of elderly individuals in each population increasing. This result stems from the changes in each districts’ tax base brought on by the endogenous migration rate. Based on this finding, this study concludes that retirees function as a positive financial externality when education funding is tied to consumption levels and reaffirms Gradstein and Kaganovich’s conclusion that increasing the relative share of elderly individuals in a population does not necessarily result in decreased funding for public education as conventional wisdom would suggest.