Discussion Paper No.2307
Abstract :
Salient features of major economies around the world, specifically in high-income countries, are graying population and declining fertility. Incorporating the quantity–quality tradeoff of children into an overlapping generations model, this paper presents an analysis of the effects of formal old-age support on fertility and economic growth. Formal old-age support provision is assumed to involve management costs and labor costs. When the management costs are sufficiently small, i.e., cost-efficient, formal old-age support raises the balanced economic growth rate, involving smaller tax burden and freeing individual time from family old-age support, but it lowers fertility. The effect on the lifetime utility of individuals is indeterminate. By contrast, when management costs are high, the increased formal old-age support deters economic growth through a negative income effect caused by the greater tax burdens, but it also lowers the fertility rate. In this case, lifetime utility becomes lower.
Keywords: fertility, human capital, old-age support, quantity-quality tradeoffJEL Classification: H51, J14, J22, J24, O40