Children as a pension plan

The Impact of pension systems on fertility rates: A lesson for developing countries?

Does a change in age structure influence economic growth? Right now in a lot of developing countries the demographical change is supporting the economical growth. Responsible for this is the growing working-age population, which is growing faster than the number of consumer right now. This we call a demographic dividend effect, which is “a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents” (United Nations Population Fund). But the problem of any further increasing fertility rate is obvious, it can’t last forever, and the proportion of consumer and producer is going to turn around. Then we are confronted with a larger amount of older-age people and only a smaller group of working-age people. Without any old-age security system, people would fall into old-age poverty, which should be avoided. To avoid this we should implement a pension plan.

Can children used as a pension plan?

Can children be used as a pension plan? Yes they can and if every household were able to get children they could obtain their pension from them, in theory. But there are households that aren’t able to have (enough) children or the children are not willing to pay for their parents, so we need another system, where everybody is paying in and at a later point is also receiving a pension.

Old idea?

In the 1890th, Germany had kind of the same problem. Within the industrial revolution the traditional family was destroyed which was up to that point responsible for the pension system. Bismarck, the former Chancellor, had the idea of a public pension system, which was implemented as a response to this problem in 1889. This pension system was the first idea of an implemented pension system and inherited soon by a lot of other countries until now. His idea of a pension was the beginning of a worldwide growing of pension systems.

But still until today there are traditional societies that are not having a social insurance system and children there, are still a safeguard against old age poverty. Of course getting children is not only a question of old age security, but under some circumstances children can be. When the old age security motive is dominating the question of fertility choices, the size of public pension system is taking an impact on the decision.

When we take a look into the history we can clearly see that in the US and in Europe within the introduction of a national pension system the fertility rate decreases. Boldrin et al. (2005) found out that within an increase in the size of the social security system of 10% of the GNP the total fertility rate reduces between 0.7 and 1.6 children (in the US and Europe). But we can see this also the other way around, when we take a look at societies, we can see that societies with more difficulties to save for old-age show a higher level of fertility.

But less children is not only to be seen as a problem, it can also be a solution for better economical growth. Children have to be fed, they have to be educated and overall they cost money. Of course they can be used also for working on the field, and also as a “natural insurance”, but studies have shown that when fertility rates decreases and the families get fewer children, the families become richer. Richer families imply then a larger amount of savings, which means a larger amount of possible investments.

 

References:

Boldrin, Michele/De Nari, Mariacristina/ Jones, Larry E. (2015): “Fertility and Social Security,” JODE – Journal of Demographic Economics, Cambridge University Press, vol. 81(3), pages 261-299, September.

Mason, Andrew / Lee, Ronald (2004): Reform and Support Systems fort he Elderly in Developing Countries: Capturing the Second Deomgraphic Dividend. GENUS 43 (2): 11:35.

Sinn, Hans-Werner (2002): „The pay-as-you-go pension system as fertility insurance and an enforcement device“, In Journal of Public Economics No. 88, p.1335-1357. Ifo Institut, Munich

http://www.unfpa.org/demographic-dividend

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