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Investing for the old age: pensions, children and savings

  • Vincenzo Galasso

    ()

  • Roberta Gatti

    ()

  • Paola Profeta

    ()

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 nonexistent 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. Copyright Springer Science+Business Media, LLC 2009

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File URL: http://hdl.handle.net/10.1007/s10797-009-9104-5
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 16 (2009)
Issue (Month): 4 (August)
Pages: 538-559

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Handle: RePEc:kap:itaxpf:v:16:y:2009:i:4:p:538-559
DOI: 10.1007/s10797-009-9104-5
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