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Investing for the old age : pensions, children and savings

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

In the last century most countries have experienced both an increase in pension spending and a decline in fertility. The authors 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. The authors build a simple two-period overlapping generations (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 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 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 The World Bank in its series Social Protection Discussion Papers with number 47101.

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Date of creation: 01 Dec 2008
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Handle: RePEc:wbk:hdnspu:47101
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