Title

Private versus public old-age security

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

12-2017

Journal or Book Title

Journal of Population Economics

Volume

31

Issue

3

First Page or Article ID Number

703

Last Page

746

DOI

10.1007/s00148-017-0681-9

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.

JEL Classification

E21, E32

Comments

This article is published as Barnett, R.C., Bhattacharya, J. & Puhakka, M. J Popul Econ (2018) 31: 703. DOI: 10.1007/s00148-017-0681-9. Posted with permission.

Copyright Owner

Springer-Verlag GmbH Germany, part of Springer Nature 2017

Language

en

File Format

application/pdf

Published Version Working Paper

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