Abstract
This article analyses how long-run pay-as-you-go public pensions react to a change in fertility in the Diamond overlapping generations model. While it might seem well established both in academic and political debates that the decline in fertility represents a “demographic time bomb” for the sustainability of public pensions, it is shown that a falling birth rate need not necessarily cause the fall of pensions in the long run.
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Notes
“That children impose economic costs on their parents seems to be widely accepted.” (Deaton and Muellbauer, 1986, pp. 720–721).
The current average contribution rate is estimated to be around 0.16 in Europe and 0.11 in the USA (see, e.g., Liikanen 2007, p. 4).
For instance, Deaton and Muellbauer (1986, p. 720) found that “Sri Lankan and Indonesian data suggest that children cost their parents about 30–40% of what they spend on themselves,” while also arguing that such estimates “would not be appropriate for developed countries where children bring heavy non-food expenditures.” (p. 741) Therefore, q ≅ 0.3 is reasonable for developed economies.
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We gratefully acknowledge the editor Prof. Alessandro Cigno and two anonymous referees for valuable comments on an earlier draft. Usual disclaimers apply.
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Responsible editor: Alessandro Cigno
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Fanti, L., Gori, L. Fertility and PAYG pensions in the overlapping generations model. J Popul Econ 25, 955–961 (2012). https://doi.org/10.1007/s00148-011-0359-7
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DOI: https://doi.org/10.1007/s00148-011-0359-7