Pensions with Endogenous and Stochastic Fertility
CORE Discussion Paper No. 2004/67
30 Pages Posted: 3 Feb 2005
Date Written: September 2004
This paper studies the design of a pay-as-you-go social security system in a society where fertility is in part stochastic and in part determined through capital investment. If parents' investments in children are publicly observable, pension benefits must be linked positively to the level of investment, and payroll taxes negatively to the number of children. The outcome is characterized by full insurance with all parents, regardless of their number of children, enjoying identical consumption levels. Without observability, benefits must increase, and payroll taxes decrease, with the number of children. The second-best level of investment in children, and the resulting average fertility rate, are less than their corresponding first-best levels.
Keywords: Pay-as-you-go social security, endogenous fertility, storage, moral hazard, Samuelson's condition
JEL Classification: H55, J13
Suggested Citation: Suggested Citation