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Fertility, Human Capital Accumulation, and the Pension System

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  • Helmuth Cremer
  • Firouz Gahvari
  • Pierre Pestieau

Abstract

This paper provides a unified treatment of externalities associated with fertility and human capital accumulation as they relate to pension systems. It considers as overlapping generations model in which every generation consists of high earners and low earners with the proportion of types being determined endogenously. The number of children is deterministically chosen but the children’s future ability is in part stochastic, in part determined by the family background, and in part through education. In addition to the customary externality source associated with a change in average fertility rate, this setup highlights another externality source. This is due to the effect of a parent’s choice of number and educational attainment of his children on the proportion of high-ability individuals in the steady state. Our results include: (i) Investments in education of high- and low-ability parents must be subsidized, (ii) direct child subsidies to one or both parent types can be negative; i.e., they can be taxes, (iii) net subsidies to children (direct child subsidies plus education subsidies) to high-ability parents are always positive, and to low-ability parents can be positive or negative, (iv) either education subsidies or child subsidies, when used alone, can dominate the other instrument, (v) using child subsidy instruments alone entails a higher fertility rate and a lower ratio of high- to low-ability children, as compared to using education subsidies alone.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-07/cesifo1_wp2736.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2736.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2736

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Keywords: pay-as-you-go social security; endogenous fertility; education; endogenous ratio of high to low ability types; three externality sources; education subsidies; child subsidies;

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References

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  1. Sinn, Hans-Werner, 2004. "The pay-as-you-go pension system as fertility insurance and an enforcement device," Munich Reprints in Economics, University of Munich, Department of Economics 938, University of Munich, Department of Economics.
  2. CREMER, Helmuth & GAHVARI, Firouz & PESTIEAU, Pierre, . "Fertility, human capital accumulation, and the pension system," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2366, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Bental, Benjamin, 1989. "The Old Age Security Hypothesis and Optimal Population Growth," Journal of Population Economics, Springer, Springer, vol. 1(4), pages 285-301.
  4. Peters, Wolfgang, 1995. "Public Pensions, Family Allowances and Endogenous Demographic Change," Journal of Population Economics, Springer, Springer, vol. 8(2), pages 161-83, May.
  5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
  6. G. Abío & Geraldine Mahieu & Cio Patxot, 2003. "On the Optimality of PAYG Pension Systems in an Endogenous Fertility Setting," CESifo Working Paper Series 1050, CESifo Group Munich.
  7. Cigno, Alessandro & Luporini, Annalisa & Pettini, Anna, 2003. "Transfers to families with children as a principal-agent problem," Journal of Public Economics, Elsevier, Elsevier, vol. 87(5-6), pages 1165-1177, May.
  8. Martin Kolmar, 1997. "Intergenerational redistribution in a small open economy with endogenous fertility," Journal of Population Economics, Springer, Springer, vol. 10(3), pages 335-356.
  9. Philippe Weil, 2008. "Overlapping Generations: the First Jubilee," Sciences Po publications info:hdl:2441/8712, Sciences Po.
  10. Helmut Cremer & Firouz Gahvari & Pierre Pestieau, 2006. "Pensions with endogenous and stochastic fertility," Working Papers 22594, Institut National de la Recherche Agronomique, France.
  11. Meier, Volker & Wrede, Matthias, 2010. "Pensions, fertility, and education," Munich Reprints in Economics, University of Munich, Department of Economics 19214, University of Munich, Department of Economics.
  12. Robert Fenge & Volker Meier, 2005. "Pensions and fertility incentives," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 38(1), pages 28-48, February.
  13. Helmuth Cremer & Firouz Gahvari & Pierre Pestieau, 2008. "Pensions with heterogenous individuals and endogenous fertility," Journal of Population Economics, Springer, Springer, vol. 21(4), pages 961-981, October.
  14. van Groezen, Bas & Leers, Theo & Meijdam, Lex, 2003. "Social security and endogenous fertility: pensions and child allowances as siamese twins," Journal of Public Economics, Elsevier, Elsevier, vol. 87(2), pages 233-251, February.
  15. Cigno, Alessandro, 1993. "Intergenerational transfers without altruism : Family, market and state," European Journal of Political Economy, Elsevier, Elsevier, vol. 9(4), pages 505-518, November.
  16. Winfried Pohlmeier & Luc Bauwens & David Veredas, 2007. "High frequency financial econometrics. Recent developments," ULB Institutional Repository 2013/136223, ULB -- Universite Libre de Bruxelles.
  17. Groezen, B.J.A.M. van & Leers, T. & Meijdam, A.C., 2000. "Family Size, Looming Demographic Changes and the Efficiency of Social Security Reform," Discussion Paper, Tilburg University, Center for Economic Research 2000-27, Tilburg University, Center for Economic Research.
  18. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521681599.
  19. Firouz Gahvari, 2009. "Pensions and fertility: in search of a link," International Tax and Public Finance, Springer, Springer, vol. 16(4), pages 418-442, August.
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Citations

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Cited by:
  1. Szilvia Szegõ, 2011. "Pensions containing allowance paid by children – why and how?," Public Finance Quarterly, State Audit Office of Hungary, State Audit Office of Hungary, vol. 56(4), pages 429-445.
  2. Michael Funke & Yu-Fu Chen, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 20908, Hamburg University, Department of Economics.
  3. CREMER, Helmuth & GAHVARI, Firouz & PESTIEAU, Pierre, . "Fertility, human capital accumulation, and the pension system," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2366, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. C. Fan & Jie Zhang, 2013. "Differential fertility and intergenerational mobility under private versus public education," Journal of Population Economics, Springer, Springer, vol. 26(3), pages 907-941, July.
  5. Giam Cipriani, 2014. "Population aging and PAYG pensions in the OLG model," Journal of Population Economics, Springer, Springer, vol. 27(1), pages 251-256, January.
  6. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).

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