Endogenous Fertility, Externality and Phase Out of Pensions

Abstract

This paper exploits a well accepted inefficiency that arises out of Pay-As-You-Go (PAYG) pensions itself to phase it out in a Pareto way. The positive externality of having children in a PAYG pension system is carefully utilized to phase the pensions out. In a model with endogenous fertility the paper first confirms the sub-optimality of parent’s choices and recommends an intergenerationally balanced childcare subsidy to correct for the externalities in a PAYG system. However, if PAYG pension program needs to be dismantled for various reasons, it can be phased out from there infinite time and, more importantly, just by exploiting the above mentioned externalities keeping the Pareto conditions intact. This phase out plan under Pareto satisfies all the standard efficiency criteria suggested in the literature when fertility is endogenous.