Investing for the Old Age: Pensions, Children and Savings

Econpubblica Working Paper No. 138

31 Pages Posted: 6 Feb 2009

See all articles by Vincenzo Galasso

Vincenzo Galasso

University of Lugano; Centre for Economic Policy Research (CEPR)

Roberta Gatti

World Bank - Development Research Group (DECRG)

Paola Profeta

Bocconi University

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2008

Abstract

In the last century most countries have experienced both an increase in pension spending and a decline in fertility, We argue that the interplay of pension generosity and development of capital markets is crucial to understand fertility decisions. Since children have traditionally represented for parents a form of retirement saving, particularly in economies with limited or non-existent capital markets, an exogenous increase of pension spending provides a saving technology alternative to children, thus relaxing financial (saving) constraints and reducing fertility. We build a simple two-period OLG model to show that an increase in pensions is associated with a larger decrease in fertility in countries in which individuals have less access to financial markets. Cross-country regression analysis support our result: an interaction between various measures of pension generosity and a proxy for the development of financial markets consistently enters the regressions positively and significantly, suggesting that in economies with limited financial markets, children represent a (if not the only) way for parents to save for old age, and that increases in pensions amount effectively to relaxing these constraints.

Keywords: PAYG pension systems, fertility, financial markets, intergenerational

JEL Classification: H55, J13

Suggested Citation

Galasso, Vincenzo and Gatti, Roberta and Profeta, Paola, Investing for the Old Age: Pensions, Children and Savings (December 5, 2008). Econpubblica Working Paper No. 138. Available at SSRN: https://ssrn.com/abstract=1338058 or http://dx.doi.org/10.2139/ssrn.1338058

Vincenzo Galasso (Contact Author)

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, 6900
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Roberta Gatti

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Paola Profeta

Bocconi University ( email )

Milan, MI
Italy

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