William Addessi (University of Cagliari)
Daniele Angelini and Marco Delogu
In a pay-as-you-go (PAYG) pension system, the welfare effects of fertility depend on the fiscal instrument through which the pension balance is restored. In standard analyses, where the pension budget is balanced by adjusting contribution rates or pension benefits, fertility generates a positive fiscal externality because additional children expand the future contributor base, implying that decentralized fertility is inefficiently low. However, pension systems are often adjusted through the retirement age. When retirement is the equilibrating margin, higher fertility not only improves pension financing but also allows earlier retirement, creating an additional retirement-leisure channel. In a simple overlapping-generation model with PAYG pension system, decentralized fertility can therefore be either too high or too low relative to the social optimum. The sign of the distortion depends on whether the retirement age required for PAYG balance is above or below the retirement age households would prefer, given the contribution rate and pension benefits.