Investing for the Old Age: Pensions, Children and Savings

Vincenzo Galasso (), Roberta Gatti and Paola Profeta ()

No 6825, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the last century most countries have experienced both an increase in pension spending and a decline in fertility. We argue that the interplay of pension generosity and development of capital markets is crucial to understand fertility decisions. Since children have traditionally represented for parents a form of retirement saving, particularly in economies with limited or non-existent capital markets, an exogenous increase of pension spending provides a saving technology alternative to children, thus relaxing financial (saving) constraints and reducing fertility. We build a simple two-period OLG model to show that an increase in pensions is associated with a larger decrease in fertility in countries in which individuals have less access to financial markets. Cross-country regression analysis supports our result: an interaction between various measures of pension generosity and a proxy for the development of financial markets consistently enters the regressions positively and significantly, suggesting that in economies with limited financial markets, children represent a (if not the only) way for parents to save for old age, and that increases in pensions amount effectively to relaxing these constraints.

Keywords: fertility; financial markets; intergenerational transfers; PAYG pension systems (search for similar items in EconPapers)
JEL-codes: H55 J13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age and nep-dge
Date: Written 2008-05

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