Pensions and fertility incentives

This paper discusses the welfare implications of a pay-as-you-go pension reform by introducing a child benefit in an endogenous fertility setting. In the model of a small open economy, higher fertility is associated with a reduction of lifetime labour supply. The optimum share of fertility-related pensions is always below unity, but generally positive. The former is true, since individuals do not take into account the impact of their labour supply choice on the parent generation. It is demonstrated that child allowances are equivalent to fertility-related pensions as instruments to achieve the optimum allocation.