Abstract
We analyze the effect of population aging on the political choice of the size of a pay-as-you-go (PAYG) social security system, incorporating the heterogeneity of individuals in their preference for having children, and hence the endogenous fertility choices of individuals, into a simple overlapping generations model. We show that population aging may result in an increase in the contribution rate, increasing the share of the retired population who prefer a higher contribution rate; and that, if the system involves redistribution between retirees with different contributions, the increased contribution rate raises the number of individuals who have children, i.e., future contributors.
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Notes
See several papers including Razin and Sadka (2007) in “Current controversies: Ageing and the welfare state” in the European Journal of Political Economy 23 (2007).
In the absence of annuity markets, our conclusion essentially holds if accidental bequests are distributed equally among children.
When the social security benefits depend on the length of the working period, i.e., when 1 > σ ≥ 1-εñ, the imperfection of redistribution affects the fertility rate. However, the effect may not overwhelm the opportunity cost effect in plausible cases. The results in case 1 > σ ≥ 1-εñ are available from the authors upon request.
Cigno and Rosati (1996: Table 2 on p. 1577) among others showed the negative relationship between female wage rates and fertility, in contrast to the positive relationship between male wages and fertility, for Germany, Italy, and UK, while the coefficients of female wages are greater than those of males. Since we assume unisex individuals in our paper, the prediction that a decrease in the after-tax wage rate (i.e., an increase in the contribution rate) raises the fertility rate in the economy is not necessarily inconsistent with their observations. See also Cigno and Werding (2007).
Even with this assumption, we can not rule out the possibility of the corner solutions because τ∈[0,1]. However, our result is valid even for the corner solutions as long as τ N <τ P.
In this case we can show that \({\mbox{d}U_t^P \left( {\tau ^R} \right)} \mathord{\left/ {\vphantom {{\mbox{d}U_t^P \left( {\tau ^R} \right)} {\mbox{d}\tau _t <0}}} \right. \kern-\nulldelimiterspace} {\mbox{d}\tau _t <0}\). Theoretically, of course, one can not exclude a priori a case in which the opposite inequality holds. In that case we may have τ P ≥τ R. It seems rather plausible that at higher contribution rates the direct cost of an increase in the rate will overwhelm the benefits from the resultant population growth.
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Acknowledgements
The authors would like to thank two anonymous referees and Alessandro Cigno, the editor of this journal. We are also indebted to Masatoshi Jin-no, Yukio Karasawa, Murray C. Kemp, Kazutoshi Miyazawa, and the seminar participants at the Nagoya Macroeconomics Workshop for their helpful comments. This research is financially supported by the Postal Life Insurance Foundation of Japan (Zaidan Hojin Kan-i Hoken Bunka Zaidan, 2006).
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Hirazawa, M., Kitaura, K. & Yakita, A. Aging, fertility, social security and political equilibrium. J Popul Econ 23, 559–569 (2010). https://doi.org/10.1007/s00148-008-0203-x
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DOI: https://doi.org/10.1007/s00148-008-0203-x