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Family Size, Looming Demographic Changes and the Efficiency of Social Security Reform

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  • Groezen, B.J.A.M. van
  • Leers, T.
  • Meijdam, A.C.

    (Tilburg University, Center for Economic Research)

Abstract

This paper analyses the eeffects of ageing and child support in a model with endogenous fertility and Pay-As-You-Go (PAYG) pensions. First, we show that the endogeneity of fertility makes society vulnerable to both pessimistic beliefs and changes in life expectancy. In particular, we show that the private fertility choice may not coincide with the social optimum, due to the existence of two external effects of a child on society as a whole. The market outcome without government intervention is efficient, however, as both externalities exactly cancel out in that case. If the government wants to redistribute towards the old, it cannot replicate the command optimum by merely applying lump-sum transfers, but rather needs a child allowance scheme to effectively alter the number of offspring chosen by households. Finally, we analyse whether a Pareto-improving social security reform is possible. It is shown that a mere reduction of the PAYG-scheme cannot be Pareto-improving, but a combined policy of decreasing the PAYG-tax and introducing child allowances can be.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-27.

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Date of creation: 2000
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Handle: RePEc:dgr:kubcen:200027

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Web page: http://center.uvt.nl

Related research

Keywords: child allowances; ageing; pensions; endogenous fertility; rumours; overlapping generations; social security reform;

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References

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  1. Homburg, Stefan, 2014. "The Efficiency of Unfunded Pension Schemes," Hannover Economic Papers (HEP) dp-523, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. BELAN, Pascal & MICHEL, Philippe & PESTIEAU, Pierre, . "Pareto-improving social security reform," CORE Discussion Papers RP -1372, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Cigno, Alessandro, 1992. "Children and Pensions," Journal of Population Economics, Springer, vol. 5(3), pages 175-83, August.
  4. Folbre, Nancy, 1994. "Children as Public Goods," American Economic Review, American Economic Association, vol. 84(2), pages 86-90, May.
  5. Harford, Jon D, 1998. "The Ultimate Externality," American Economic Review, American Economic Association, vol. 88(1), pages 260-65, March.
  6. Corneo, Giacomo & Marquardt, Marko, 2000. "Public pensions, unemployment insurance, and growth," Journal of Public Economics, Elsevier, vol. 75(2), pages 293-311, February.
  7. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-88, September.
  8. Galor, Oded & Stark, Oded, 1990. "Migrants' Savings, the Probability of Return Migration and Migrants' Performance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 463-67, May.
  9. FranÚois Bourguignon, 1999. "The cost of children: May the collective approach to household behavior help?," Journal of Population Economics, Springer, vol. 12(4), pages 503-521.
  10. Becker, Gary S & Lewis, H Gregg, 1973. "On the Interaction between the Quantity and Quality of Children," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages S279-88, Part II, .
  11. Bental, Benjamin, 1989. "The Old Age Security Hypothesis and Optimal Population Growth," Journal of Population Economics, Springer, vol. 1(4), pages 285-301.
  12. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-77, September.
  13. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
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Cited by:
  1. Cremer, Helmuth & Gahvari, Firouz & Pestieau, Pierre, 2004. "Pensions with Endogenous and Stochastic Fertility," IDEI Working Papers 305, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Robert Fenge & Volker Meier, 2005. "Pensions and fertility incentives," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 28-48, February.
  3. CREMER, Helmuth & GAHVARI, Firouz & PESTIEAU, Pierre, 2010. "Fertility, human capital accumulation, and the pension system," CORE Discussion Papers 2010054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Firouz Gahvari, 2009. "Pensions and fertility: in search of a link," International Tax and Public Finance, Springer, vol. 16(4), pages 418-442, August.
  5. Martin Werding, 2006. "Kinderrente und Vorsorgepflicht - der ifo-Vorschlag zur Lösung der demographischen Krise des Rentensystems," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 59(07), pages 44-53, 04.
  6. Theo Leers & Lex Meijdam & Harrie A. A Verbon, 2001. "The Politics of Pension Reform under Ageing," CESifo Working Paper Series 521, CESifo Group Munich.

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