Children and Pensions

Abstract

An analysis of the effect of public pension schemes on a country's fertility rate and a proposal for policies to reform pension coverage in light of this. The rapidly aging populations of many developed countries—most notably Japan and member countries of the European Union—present obvious problems for the public pension plans of these countries. Not only will there be disproportionately fewer workers making pension contributions than there are retirees drawing pension benefits, but the youth-to-age imbalance would significantly affect the total contributive capacity of future generations and hence their total income growth. In Children and Pensions, Alessandro Cigno and Martin Werding examine the way pension policy and child-related benefits affect fertility behavior and productivity growth. They present theoretical arguments to the effect that public pension coverage as such will reduce aggregate fertility and may raise aggregate household savings. They argue further that public pensions, as they are currently designed, discourage parents from private human capital investment in their children to improve the children's future earning capacity. After an overview of pension and child benefit policies (focusing on the European Union, Japan, and the United States), the authors offer an empirical and theoretical analysis and a simulation of the effects of the policies under discussion. Their policy proposals to address declines in fertility and productivity growth include the innovative suggestion that relates a person's pension entitlements to his or her number of children and the children's earning ability—proposing that, in effect, a person's pension could be financed in part or in full by the pensioner's own children.

Endogenous Demographic Change, Retirement, and Social Security

“…When setting pension policies, governments should also consider how they trigger changes in individual behavior, including fertility and labor supply. The link between fertility and pensions is, of course, very well known in the literature [for an extensive review see Cigno and Werding (2007)]. The novelty of our approach is to consider a setting with endogenous retirement and show that in a pure DC pension setting, if retirement is freely chosen by agents, the pension consequences of increasing life expectancy can be ameliorated, even though there is still a fertility decline and a consequent population ageing.…”

Longer Life and Higher Fertility in an OLG Economy with Production

“…14 This result contrasts with that found by Yakita and seems to be in accord with a certain common wisdom, which argues that "public pensions themselves are in part to blame for the fertility decline" (Cigno [13, page 37]). 15 Armed with this result, now we study whether and how Proposition 1 is changed by the introduction of the PAYG social security system. Therefore the following proposition holds.…”

“…15. As to the issue of the relationship between pension systems and low fertility in Europe, see, for instance, Cigno and Werding [15]. 16.…”

One pillar crumbling, the others too short: old-age provision in Germany

“…Börsch-Supan et al (2015) show that these workers have much higher benefit entitlements and are also much healthier than average individuals who are just about to enter retirement. A third major element -increases in childrelated benefit entitlements -fixed a perceived inequity between mothers of children born before or after 1992; but it was not designed to alter incentives to have children and to invest in their human capital -which is how pay-as-you-go systems are actually 'pre-funded' (Cigno and Werding, 2007). 4 These figures are 'quasi-replacement rates' based on benefits deriving from a full earnings record with 45 qualifying years at average earnings compared to the average earnings of current contributors.…”