Investing for the old age: pensions, children and savings

Vincenzo Galasso, Roberta Gatti () and Paola Profeta

International Tax and Public Finance, 2009, vol. 16, issue 4, 538-559

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 nonexistent 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. Copyright Springer Science+Business Media, LLC 2009

Keywords: PAYG pension systems; Fertility; Financial markets; Intergenerational transfers; H55; J13 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (25)

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Working Paper: Investing for the Old Age: Pensions, Children and Savings (2008)
Working Paper: Investing for the old age: pensions, children and savings (2008)
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DOI: 10.1007/s10797-009-9104-5

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