Education and pensions are used for inter‐ and intra‐generational redistribution. They constitute major components of the annual budget. The incessant need to free additional resources out of tightened budgets may explain why most western governments are contemplating reforms to both the education and the pension systems. However, voter preferences cannot be ignored by career‐concerned politicians: both pensions and education come under very close scrutiny, which limits the policy space of politicians with re‐election concerns.

Public spending on education correlates (Figure 1) negatively with the Bismarkian factor (the contributory component of the pension) and positively with the total spending on pensions. Our paper contributes to the literature on the political economy of publicly provided goods, by combining voters' concerns for the provision of public education and pensions. In particular, we investigate the interconnection between public spending on education and pensions, when citizens are also offered a private‐education alternative. We are specifically interested in looking at how the voters' support for publicly‐funded education may vary depending on the characteristics and generosity of the retirement scheme.

ecin13094-fig-0001.jpg 1 Public spending on education (% of GDP) in OECD countries with above‐average spending on pensions versus: [left] Bismarck factor and [right] spending on pensions (% of GDP). Authors' calculations based on World Bank, OECD and Krieger and Traub's (2011, 2013) data. [left] Correlation Education‐Bismark ≈ − 0.33; [right] Correlation Education‐Pensions ≈ 0.52. See Appendix B for more details

Education provides private benefits to students and public education may help to level the playing field for new generations. Together with parents' altruism toward their own children, this may explain some support for a publicly funded system. However, the political equilibrium may depend on the presence of a private alternative (Epple & Romano, 1996a,b; Cohen‐Zada & Justman, 2003) and, possibly, also on how private school is financed (Akyol, 2016; Chen & West, 2000; Epple et al., 2018; Epple & Romano, 1998; Gradstein & Justman, 2005; Piolatto, 2010). Beyond that, education produces positive externalities, for example, it helps to reduce social conflicts (Brutti & Montolio, 2021; Gradstein, 2000). More importantly, education affects employment, economic growth, income and productivity (Altindag et al., 2022; Barro, 2013; Baum & Lake, 2003; Gradstein & Justman, 1997; Romer, 1986; Sanchez‐Losada, 2000).

Investing in education becomes a way to increase the productivity of the future labor force. Our model shows that citizens can reappropriate part of the spending on education through the pension system as long as it includes a 'pay‐as‐you‐go' (inter‐generation redistributive) component.[ 1] When this is the case, citizens start to care about the quality of education of all the young, not just of their offspring, because a larger investment in education today affects the state ability to finance pensions tomorrow. This mechanism affects positively the support for publicly funded education also among households who opted for a private‐education school. The importance of such a redistribution channel depends on the magnitude of the retirement system. Consequently, the generalized support for publicly funded education hinges on the combination of the Bismark (contributory) component of pensions and of the size of the pension scheme. Our empirical analysis tests and confirms the model's predictions.

In our two‐period stylized model, adults choose the type of education for their offspring (private or public) and vote over the income tax rate that finances current public education. Agents are concerned by their current and future consumption, where the latter depends on pensions. We take the tax rate that finances pensions as exogenous (Section 2.1 discusses this assumption), yet agents can influence their future pensions by investing in the education of young agents, as this increases future average income and, therefore, the level of inter‐generational redistribution. We investigate the extent to which incentives to invest in education are affected by the pension system and, more particularly, by the importance of its contributory and redistributive components.

We conclude that the agents' support for publicly funded education is i) decreasing in the Bismarck (contributory) component of pensions and ii) increasing in the magnitude/generosity of the pension system. Hence, the lower the degree of intergenerational redistribution characterizing the pension system, the less willing agents are to invest in public education. Furthermore, agents care more about public education as the stake in their pensions increases.

We combine micro‐level and country‐level data, to provide a formal test for these theoretical predictions. We exploit four waves of a survey on public opinion about public policies run between 1985 and 2006 in 13 countries among a nationally representative sample of individuals including, on aggregate, more than 30,000 respondents. We provide strong validation of the theoretical predictions by employing several different specifications and a progressively less parsimonious set of control variables. Namely, our results confirm that the support for publicly financed education is decreasing in the Bismarckian factor (estimated by Krieger & Traub, 2013) while it is increasing in the generosity of the pension system measured as the public expenditure (% of GDP) on old‐age pensions.

Lancia and Russo (2016) consider a setting similar to ours. Their dynamic theoretical model focuses on the generational conflict between workers and pensioners over the allocation of budget. Current pensioners are not interested in education spending, while workers are only interested in future pensions. They study the conditions under which the implementation of public education and social security survive voting in a small open economy. What crucially distinguishes our work from theirs is the fact that we allow parents to choose between public and private education, that we explicitly model the degree of redistribution of the pension system (through the Bismark factor) and that we test our predictions using individual‐level data.

Our work is also related to Bishnu and Wang (2017), who study how investments in education and pensions have general equilibrium effects. Their focus is specifically on the welfare consequences of it. We are also close in spirit with Bellettini and Ceroni (1999) who, in the words of the authors, 'show that redistributive and growth‐oriented policies, although competing for scarce tax revenues, might go hand in hand and bring about fast economic growth. In particular, the aim of [their] paper is not to provide a positive theory for the existence of social security systems, but rather to show how to design a social security system which may foster public investment and economic growth.'

The idea that education, affecting growth, allows increasing the tax proceeds that will finance future pensions is not new. Kaganovich and Zilcha (1999) focus on the optimal allocation of fixed tax proceeds between education and social security. Bellettini and Ceroni (2000); Pecchenino and Pollard (2002) and Zhang and Zhang (2004) study the impact of social security and education on growth; Soares (2003) studies the preference of agents for public investment in education and how they allocate their time between education and work. Boldrin and Montes (2005, 2009) undertake normative studies of education and pensions and the optimal intergenerational transfer scheme. Poterba (1998); Echevarría (2004); Sanz and Velázquez (2007); Cattaneo and Wolter (2009); Rattsø and Sørensen (2010) and Gonzalez‐Eiras and Niepelt (2012) look at how a change in the composition of society (age distribution, life expectancy, etc.) affects the provision of pensions and education, given a fixed budget. Those authors disregard the political feasibility of policies aimed at financing public education. Instead, we focus on how forward‐looking adults change their behavior and invest in young's education, to guarantee a sustainable pension system in the future.