DP5553 Pensions with Heterogenous Individuals and Endogenous Fertility

Author(s): Helmuth Cremer , Firouz Gahvari , Pierre Pestieau

Publication Date: March 2006

Keyword(s): pensions , fertility , adverse selection

JEL(s): H55 , J13 , J26

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP5553.asp

This paper studies the design of pension schemes in a society where fertility is endogenous and parents differ in their ability to raise children. In a world with perfect information, a pay-as-you-go social security system is characterized by equal pensions for all but different contributions which may or may not increase with the number of children. Additionally, fertility must be subsidized at the margin to correct for the externality that accompanies fertility. In a world of asymmetric information, incentive-related distortions supplement the Pigouvian subsidy. These may either require an additional subsidy or an offsetting tax on fertility depending on whether the redistribution is towards people with more or less children. In the former case, pensions are decreasing in the number of children: in the latter case, they are increasing.