Private versus public old-age security

Richard Barnett, Joydeep Bhattacharya and Mikko Puhakka

ISU General Staff Papers from Iowa State University, Department of Economics

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.

Date: 2017-12-01
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Related works:
Journal Article: Private versus public old-age security (2018)
Working Paper: Private versus Public Old-Age Security (2012)
Working Paper: Private versus public old-age security (2012)
Working Paper: Private versus public old-age security (2012)
Working Paper: PRIVATE VERSUS PUBLIC OLD-AGE SECURITY (2012)
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