Endogenous Fertility, Endogenous Growth and Public Pension System: Should We Switch from a Pay‐As‐You‐Go to a Fully Funded System?

Abstract

In this paper we study the implications of state pension plan reform on fertility and on growth. We extend the Grossman and Yanagawa endogenous growth framework by incorporating altruism, making fertility endogenous. We investigate the effect on long‐run growth of a switch from a pay‐as‐you‐go (PAYG) pension system to a fully funded system. We show that a PAYG pension system is associated with a lower fertility rate than a fully funded system. This lower fertility in turn increases the rate of growth. Hence, switching from a PAYG system to a fully funded system may be harmful, especially for developing countries in which limited resources are heavily stressed by high fertility rates. In addition, we propose a hypothetical pension system, the saving subsidy programme (SSP), which would yield a higher growth rate than the PAYG system. The SSP consists of a minimum benefit level for each retired and of a subsidy to private savings.