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Investing for the Old Age: Pensions, Children and Savings

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  • Galasso, Vincenzo
  • Gatti, Roberta
  • Profeta, Paola

Abstract

In the last century most countries have experienced both an increase in pension spending and a decline in fertility. We argue that the interplay of pension generosity and development of capital markets is crucial to understand fertility decisions. Since children have traditionally represented for parents a form of retirement saving, particularly in economies with limited or non-existent capital markets, an exogenous increase of pension spending provides a saving technology alternative to children, thus relaxing financial (saving) constraints and reducing fertility. We build a simple two-period OLG model to show that an increase in pensions is associated with a larger decrease in fertility in countries in which individuals have less access to financial markets. Cross-country regression analysis supports our result: an interaction between various measures of pension generosity and a proxy for the development of financial markets consistently enters the regressions positively and significantly, suggesting that in economies with limited financial markets, children represent a (if not the only) way for parents to save for old age, and that increases in pensions amount effectively to relaxing these constraints.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6825.

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Date of creation: May 2008
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Handle: RePEc:cpr:ceprdp:6825

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Keywords: fertility; financial markets; intergenerational transfers; PAYG pension systems;

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