Pensions and fertility: a simple proposal for reform

This paper evaluates the effects of a parametric adjustment to an earnings-related PAYG pension system. We show that a simple but ‘intelligent’ reform, in which the calculation of the pension base is changed, may result not only in more employment and growth, but also in an increase in fertility. Such an ‘intelligent’ pension design would maintain a strong link between own labor income and the future pension, while putting more (less) weight on the labor income earned as an older (young) worker in the calculation of the pension base. The higher (lower) marginal utility from work when older (young) following this reform makes it interesting to shift work from the first to later periods of active life. Part of the available time that arises during youth is spent on education. Another part can be spent on raising offspring. By contrast, a shift to a fully-funded system might even reduce fertility.