PensionReforms' summary and comments
 
This paper is founded on the principle that falling birth rates are, in part, caused by PAYGO pensions.  One of the reasons many countries face a financing problem is the compression of the lower layers of the traditional population pyramid.  Fix that and the PAYGO pensions 'crisis' will disappear.  So why not build an incentive to have children into the design of the pension system itself?

"In an overlapping-generations model with endogenous birth rates, I constructed a PAYGO-pension-system reform, which implies a Pareto improvement - provided that the Pareto criterion is accepted with endogenous population size and given that peoples' expectations are correct - even if any number of individuals has different preferences and a child is an inferior good. This improvement is based on removing a distortion in PAYGO systems in which efforts for raising children are not appropriately honoured; the children's pension contributions are an externality in so far as the pension benefits do not depend on the individual number of children. Since a Pareto improvement requires that nobody loses, people get the option of keeping the status quo. People with sufficiently high preferences for children, however, are better off in an individualised pension system, in which they get exactly the amount of pension benefits - before subtracting a lump-sum amount necessary for subsidising part of the status-quo pensioners - which is (expectedly) financed by their own children.

In reality, of course, this calculation would have to be based on contributions averaged over all contributors, because children differ in their luck and their abilities, which their parents are not (fully) responsible for. In principle, the (model- exogenous) pension contributions per contributor can be computed by multiplying a fixed contribution rate with the labour income of all contributors within one generation's time and dividing this contribution sum by the (average) number of contributors. Details would remain to be defined."

PensionReforms certainly agrees that 'details remain to be defined', as the details are where it all seems to come unstuck.  This paper is one of an emerging literature on linking children to the size of an individual's pension. All of the measurement issues in the 'model' are assumed soluble. For example there is no discussion of how a man gets his pension when paternity is itself not an 'effort'  and he may not have been involved in child rearing.

While birth rates may have fallen and governments may, contemporaneously, have introduced PAYGO pensions, PensionReforms thinks it most unlikely that the latter causes the former.  Even if we accepted that proposition, it is even less likely that an "individualised pension system" might induce younger citizens to have more children. PensionReforms acknowledges that financial incentives can affect the birth rate, (not itself an argument for or against them) but the ones that work are those that deliver money immediately to young families themselves.

If the decision is made at 65, based on the number of children already born and how well they are contributing, ex post, the incentive to have children disappears.  It's rather unlikely that a 20 year old would be able to decide which scheme is best.

The reform implies that the country must adopt an "individualised pension system" (compulsory Tier 2).  They have significant problems of their own that alone should cause governments to pause for thought. 

And anyway, why have contributions (or a work history requirement) for either the PAYGO system or the alternative? 

PensionReforms suggests that, if a government wanted to directly address the need to encourage its citizens to produce more children, spending money on the children themselves is more likely to be successful - and they already do that, perhaps not well enough.  Governments usually subsidise families by child-related supplements and meet the costs of healthcare, childcare and education, at the cost of all taxpayers (including those who don't have children).  PensionReforms thinks the adequate investment in children and  pensions are separate issues and should be addressed separately.    77