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The pay-as-you-go pension system as fertility insurance and an enforcement device

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  • Sinn, Hans-Werner

Abstract

It is argued that a PAYGO system may have useful allocative functions in that it serves as an insurance against not having children and as enforcement device for "rotten kids" who are unwilling to pay their parents a pension. It is true that the system has a moral hazard effect in terms of reducing the investment in human capital, but, if it is run on a sufficiently small scale, this effect will not be strong enough to prevent a welfare improvement. If, on the other hand, the scale of the system is so large that parents bequeath some of their pensions to their children, it is overdrawn and creates unnecessarily strong disincentives for human capital investment.
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  • Sinn, Hans-Werner, 2004. "The pay-as-you-go pension system as fertility insurance and an enforcement device," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1335-1357, July.
    • Handle: RePEc:eee:pubeco:v:88:y:2004:i:7-8:p:1335-1357
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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J1 - Labor and Demographic Economics - - Demographic Economics

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