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Journal of Population Economics

, Volume 31, Issue 3, pp 703–746 | Cite as

Private versus public old-age security

  • Richard C. Barnett
  • Joydeep BhattacharyaEmail author
  • Mikko Puhakka
Original Paper
  • 379 Downloads

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.

Keywords

Fertility Family compacts Social security Intergenerational cooperation Pensions Self-enforcing constitutions 

JEL Classification

E 21 E 32 

Notes

Acknowledgements

Puhakka thanks the Yrjö Jahnsson Foundation and the OKO Bank Foundation for support. The authors thank two anonymous referees for their generosity and patience, and the editor-in-charge, Alessandro Cigno, along with Costas Azariadis, Susan Barnett, and Huberto Ennis for valuable feedback.

Supplementary material

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.School of Economics LeBow College of BusinessDrexel UniversityPhiladelphiaUSA
  2. 2.Department of EconomicsIowa State UniversityAmesUSA
  3. 3.Department of Economics, Oulu Business SchoolUniversity of OuluOuluFinland

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