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Private versus public old-age security

Author

Listed:
  • Richard C. Barnett

    () (Drexel University)

  • Joydeep Bhattacharya

    () (Iowa State University)

  • Mikko Puhakka

    () (University of Oulu)

Abstract

Abstract We directly compare two institutions, a family compact—a parent makes a transfer to her parent in anticipation of a possible future gift from her children—with a pay-as-you-go, public pension system, in a life cycle model with endogenous fertility wherein children are valued both as consumption and investment goods. Absent intragenerational heterogeneity, we show that a benevolent government has no welfare justification for introducing public pensions alongside thriving family compacts since the former is associated with inefficiently low fertility. This result hinges critically on a fiscal externality—the inability of middle age agents to internalize the impact of their fertility decisions on old-age transfers under a public pension system. With homogeneous agents, a strong-enough negative aggregate shock to middle-age incomes destroys all family compacts, and in such a setting, an optimal public pension system cannot enter. This suggests the raison d’être for social security must lie outside of its function as a pension system—specifically its redistributive function which emerges with heterogeneous agents. In a simple modification of our benchmark model—one that allows for idiosyncratic frictions to compact formation such as differences in infertility/mating status—a welfare-enhancing role for a public pension system emerges; such systems may flourish even when family compacts cannot.

Suggested Citation

  • Richard C. Barnett & Joydeep Bhattacharya & Mikko Puhakka, 2018. "Private versus public old-age security," Journal of Population Economics, Springer;European Society for Population Economics, vol. 31(3), pages 703-746, July.
  • Handle: RePEc:spr:jopoec:v:31:y:2018:i:3:d:10.1007_s00148-017-0681-9
    DOI: 10.1007/s00148-017-0681-9
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    More about this item

    Keywords

    Fertility; Family compacts; Social security; Intergenerational cooperation; Pensions; Self-enforcing constitutions;

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E - Macroeconomics and Monetary Economics

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