Effect of social security on fertility and savings: an overlapping generations model

Old-age pension schemes do not exist in most developing countries, so adults bear children as security investments for the future. This phenomenon leads to unduly high rates of population growth. It has been hypothesized that introducing social security programs in such countries would increase savings rates and reduce the number of children born over the long term. The author studies the general equilibrium effects of some social security programs on rates of population growth and capital accumulation within an overlapping generations framework with endogenous fertility and savings. Specifically, Raul's overlapping generations growth model is extended to study the general equilibrium effects of payroll-tax-financed and child-tax-financed social security programs. It is shown that if the rate of intergenerational income transfers from young to old or child care cost is low, competitive equilibrium leads toward overpopulation and capital accumulation in a modified Pareto optimal sense; a social security program in such a case is therefore Pareto improving. A fully-funded system is not neutral when financed by child taxes. Finally, it is also shown that unlike in the case of exogenous fertility where competitive equilibrium attains steady state only asymptotically, fertility, when endogenous, may attain a unique globally steady state in finite time.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

Demographic links to savings in life cycle models: identification of issues for LDCs

The author considers the potential for a link between the recent pattern of demographic transition and intertemporal and inter-country variations in savings rates. Fertility, infant mortality, life expectancy, and levels of female and child labor force participation are among the various demographic factors which affect national savings rates through their effects upon age structure, age-specific individual savings behavior, and their general equilibrium effects upon interest rates, wage rates, and income distribution. The author establishes a simple discrete time life cycle model of savings, explains the issues related to age structure, and discusses the effect of age-specific savings functions, the general equilibrium effects of demographic factors, the effects of life expectancies and child mortalities, and the nature of social security coverages in less developed countries, as well as issues which are especially important for less developed countries. A new strategy for empirically evaluating demographic policies is proposed. That is, one can estimate the age profile of earnings, saving and fertility rates from household survey data. The life tables can then be used to compute the aggregate savings rate and population size. Any demographic policy which affects the fertility rate, life expectancy, and investment in the quality of children will change the aggregate saving and population growth rates. These two aggregate effects could be compared to evaluate demographic policies. The author stresses, however, that changes in different demographic factors will have different short-run and long-run effects upon the savings rate which will also depend upon whether such changes are transitory or permanent.     

Growth,fertility and human capital: A survey

This paper surveys recent work on endogenous fertility and endogenous growth. These models provide the building blocks for a theory of development. They are capable of explaining income and fertility differentials between rich and poor countries. They can produce switching behavior, countries that transform themselves from no growth economies into high growth economies. The fertility and growth effects of social security programs are also examined. Finally models with increasing returns to population are presented. They are capable of reproducing very long term relationships between human capital, fertility and economic growth.     

Endogenous fertility, international migration and growth

An endogenous growth model with heterogeneous agents and endogenous rates of fertility is developed to study the relationships between population growth, human capital, migration and economic development. A variety of patterns of migration, from the migration of the unskilled to the brain drain is considered, where the decision to migrate reflects the agents’ optimising behaviour. The analysis yields implications which accord with the empirical evidence on the relationships between demography and development. Macroeconomic policy can foster growth by influencing labour mobility through taxation and the provision of public goods such as social infrastructure, sanitation, environmental control and medical research that affect locational preferences and child quality. The author is grateful for the comments of an anonymous referee on an earlier version of the paper. The usual disclaimer applies.     

Capital income taxation and perfect foresight

This paper develops a perfect foresight model of capital income taxation in a representative household neoclassical one-sector framework. The household sector is based on intertemporal utility maximization. The main result is the equivalence of a perfect foresight solution and an artificial central planning solution; if there is no tax, this is the equivalence of a market equilibrium and social optinum. The equivalence result is used to deduce the implications of a partial tax reform policy. It is shown that a partial reform increases capital at each time following the initial period of the program.     

Jointly determined saving and fertility behaviour: theory,and estimates for Germany,Italy, UK and USA

This study uses new theories of capital accumulation and fertility in a comparative framework to test predictions with time-series data for Germany, Italy, the UK, and the US. The exogenous-fertility model is based on models of Barro and Becker. The endogenous-fertility models are based on models of Veall and Nishimura and Zhang. It is assumed that life cycle periods are youth, middle age, and old age. Several theoretical frameworks are tested with endogenous and exogenous fertility and altruism and nonaltruism. Data are obtained during 1950-90. Dependent variables are the total lifetime fertility rate and real per capita household savings. Explanatory variables include social security, the real social security deficit per capita, the real rate of interest, the real per capita disposable income, the average male real wage rate, the average female real wage rate, and the real child benefit rate. The explanatory variables are individually graphed to show differences by country over time. Findings suggest that fertility is endogenous in a nonaltruistic model. The only model not rejected by the data was the model in which fertility and intergenerational transfers were explained by nonaltruistic concerns. Fertility was positively affected by the male wage rate in all countries. Fertility was negatively affected by the female wage rate in all countries. Disposable income was insignificant in the UK and Germany and positive and significant in Italy and the US. The interest rate was significant in only 1 model. Child benefits had a positive and significant effect on fertility in the UK. In savings models, disposable income was significant and positive, and child benefits and wage rates were insignificant. Social security coverage had a negative effect on fertility and a positive effect on savings, except in Germany. Findings indicate that saving and fertility are jointly determined.     

Italy’s demographic trap: Voting for childcare subsidies and fertility outcomes

In this paper we study how population aging impacts the age distribution of the voting electorate and voters’ choices over childcare subsidies. We build a computable general equilibrium framework populated by heterogeneous agents who, over the course of their life-cycle, make endogenous and age-dependent fertility choices. The model is calibrated to match economic and population outcomes of the Italian economy. Child support favors young and fertile cohorts but can also impact all population subgroups through changes in prices, income taxation and population growth. A probabilistic voting model is used to measure voting outcomes over a range of childcare subsidy levels and tax policies. Our findings show that childcare subsidies have a positive impact on the total fertility rate and are welfare improving when financed with both capital and labor income taxation and in combination with lower pension contribution rates. A 10 percent increase in the level of subsidies can increase the population growth rate by an average of 0.47–0.70 percentage points. We find that voting choices of different population subgroups, while depending on the tax used to finance new expenditure, lead to lower levels of childcare subsidies, lower fertility rates and to a demographic ‘trap’.     

Redistributive policy,inequality and growth

Does redistribution increase inequality? Is inequality harmful for growth? Both questions have recently been addressed in a number of single-tax models. In this paper, I examine the relationship between policy, growth and inequality when income and inherited wealth can be taxed at different rates. In the model, parents accumulate human capital and a return-bearing, storable good in order to increase the quality of their children. Inequality arises because the learning ability of children is stochastic. Redistributive labor income taxation has a negative impact on short- and long-run growth while taxation of inherited stocks increases growth. Effects of both taxes on income inequality are ambiguous. A switch from income to inheritance taxation may increase average utility of all generations involved. I calculate a structure-induced equilibrium of the political process by means of a stochastic simulation of the model. In the short run initial wealth-inequality can stimulate growth, while initial inequality of the endowment with human capital is harmful for growth.     

Health spending,savings and fertility in a lifecycle‐dynastic model with longevity externalities

We investigate health spending, savings, fertility and policy implications in a lifecycle‐dynastic model with longevity externalities in annuity returns. We show that such externalities engender not only excessive health spending but also under‐saving and excessive fertility. Social security and health subsidization increase health spending and savings but reduce fertility from laissez‐faire levels. A publicly funded universal health system under labour‐income taxation raises fertility. Taxing health spending or using social security and public health together can obtain socially optimal health spending, savings, longevity and fertility. Numerical results based on US observations suggest substantial variations among these cases, especially in old‐age health spending.     

Optimal social security in a dynastic model with human capital externalities,fertility and endogenous growth

In this paper we investigate the optimal scale of pay-as-you-go social security in a dynastic family model with human capital externalities, fertility and endogenous growth. Human capital externalities reduce the return to human capital investment and hence lead to under-investment in human capital and over-reproduction of the population. If the taste for the number of children is sufficiently weak relative to the taste for the welfare of children, social security can be welfare enhancing by reducing fertility and raising human capital investment per child.     

Aid and the growth of income in aid-favoured developing countries: policy issues

This paper opens by expressing disappointment in the disparities between published estimations of the effectiveness of foreign aid to developing countries and effectiveness data which arise from the application of complex econometric methods. The new dilemmas for aid policy include the fact that aid increasingly devoted to human development at the expense of productive activity is unlikely to create the material development which will allow maintenance of human development targets. The second part of the paper presents comparative statistics on gross national product, official development assistance, and savings growth which paint a disturbing picture because the growth of domestic savings has been negative in the period 1967-87 in nine of the 11 less developed countries with data available. Section 3 covers the shortcomings of econometric experiments which neither confirm nor deny the findings of other studies on the effectiveness of aid. The fourth section describes constraints to the growth of income imposed by the foreign exchange, the rate of return on investment, and the growth of labor productivity and presents statistical evidence supporting aid policy which would 1) take advantage of opportunities to rehabilitate output growth in traditional industries without the addition of a great deal of capital, 2) direct attention to increasing the absolute gross national product (GNP) to raise the growth of per capital income, and 3) strategically reorient the structure of aid to increase the absolute GNP faster to accelerate reversal of the negative savings pattern and speed the reduction of fertility. Section 5 considers suggested shifts in aid policy orientation dealing with 1) population growth, income level, and food security; 2) reconstruction and structural adjustment; 3) rationalizing aid for social, institutional, and human development and technical assistance. The concluding section notes that the suggested strategic reorientation of the structure of aid should result in reduced population growth.     

Fertility,Female Labor Supply,and Family Policy

The present paper develops an overlapping generations general equilibrium model for Germany in order to study the impact of public policy on household labor supply and fertility decisions. Starting from a benchmark equilibrium which reflects the current German family policy regime we introduce various reforms of the tax and child benefit system and quantify the consequences for birth rates and female labor supply. Our simulations indicate three central results: First, higher transfers to families (either direct, in‐kind or via family splitting) may increase birth rates significantly, but they may come at the cost of lower female employment. Second, the introduction of individual taxation (instead of joint taxation of couples) would increase female employment but might further reduce current birth rates in Germany. Third, it is possible to increase birth rates and female employment rates simultaneously if the government invests in child care facilities for children of all ages.     

Soviet theories of economic demography: a survey

At this time Soviet demographic scientists maintain the position that population problems may in fact exist temporarily under socialism but that the planning principle will allow society to resolve population problems, through the use of the administrative, moral, and economic levers (subsidies, government policies, propaganda, education) emphasized by Urlanis (1974) and others. For planners to deal effectively with population management, the determinants of fertility and labor force participation must be established. The foundations of Soviet theories of human capital and fertility were laid by several writers. For the sake of simplicity, these are referred to as the Urlanis-Strumilin model, named after 2 pioneer researchers in Soviet demography and manpower economics. The formulations are based upon the writings of Strumlin (1964) and Urlanis (1974), supplemented by writings of numerous other Soviet researchers. Although their models avoid neoclassical terms such as marginal utility and income and price elasticities, they clearly employ these concepts. The Urlanis-Strumilin model, reduced to its basic elements, is a direct household utility maximizing model. The husband and wife, the household decision makers, must select optimal levels of child "quantity," child "quality," leisure, their own human capital (further education and training), and other goods. The Soviet theory recognizes that an increase in household income will increase relatively the demands for income elastic goods. The model postulates that the demand for child quality is inversely related to the price of children. The price of children is the opportunity cost of children, the major element of which is the income foregone by the mother in the course of childbearing and childrearing. The child quantity demand schedule has elastic and inelastic portions. The marginal utility of the 1st child is great. The marginal utilities of higher order children decline substantially. Families with at least 1 child can make substitutions between having more children and raising the quality of children already born. The question is what does the model predict will happen to fertility with economic development. The positive income effect will be limited as increased income is channelled into child quality and other superior goods rather than child quantity. The Urlanis-Strumilin model of labor supply assumes that the household allocates its time among market employment, household production. The model shows that the effect of children on female labor supply is not ambiguous. The presence of young children raises the value of home services and lowers long run market wages, thereby reducing female market labor supply. According to the model, the socialist state can manipulate labor supplies through several channels. It can reduce the value of home services by providing market substitutes. Soviet writers recognize the linkages between labor supply and fertility without formalizing the simultaneous relationship. The comparative statics of the Soviet model are essentially the same as those of the neoclassical model: an increase in "costs" of children will have, at best, a small positive impact on fertility.     

Optimal income taxation in models with endogenous fertility

This paper studies the efficient taxation of factor income in infinite-lived models with elastic fertility choices. Two models are considered, one with physical capital only, and one with physical and human capital. In the model with physical capital only, capital income should be subsidized, while labor income taxed. In the model with two types of capital, instead, Ramsey optimality prescribes that the tax on physical capital is zero (negative), if effective labor is constant (decreasing) returns to scale in human capital and market goods, while the tax on human capital is negative and the tax on effective labor positive. Our findings depart from those obtained in immortal models with an endogenous labor supply and constant population growth, because physical and human capital affect the demand for fertility.     

Capital income taxation in a growing world economy

This paper deals with dynamic adjustment in large economies to changes in the rate of capital income taxation or in the rate of investment tax credit in one country. The framework applied in the paper is a continuous-time, overlapping generations model with two countries. It features population growth and debt non-neutrality. We address impact and steady state effects of capital income tax and investment subsidy changes in the home country on consumption per capita, the capital intensity, and the per capita net foreign asset position in both countries. We also briefly consider individual welfare consequences of these policies.     

Population growth and economic and social development

This article sets forth 3 positions on population growth: 1) rapid population growth is a central development problem that implies lower living standards for the poor; 2) proposals for reducing population growth raise difficult questions about the proper domain of public policy, yet it is acceptable for governments to attempt to influence private decisions about family size; and 3) the experience in many developing countries shows that quick, effective measures can be taken to reduce fertility. Rapid population growth has slowed development because it exacerbates the difficult choice between higher consumption in the present and the investment needed to bring higher consumption in the future. As populations grow, larger investments are needed just to maintain current capital/person. It further threatens the balance between natural resources and people and creates severe economic and social problems in urban areas. Public policy must provide alternative ways for poor families to secure the benefits provided by large family size. That is, governments need to provide tangible evidence that it really is in the best interests of parents to have fewer children. Also required is greater infomation about and access to fertility control. When family planning services have been widespread and affordable, fertility has decline faster than social and economic progress alone would predict. There is a need for immediate action to improve women's status and to make education, family planning, and primary health care more available. Although economic and social progress help to slow population growth, rapid population growth hinders development. Thus, governments must act simultaneously on both fronts. Accumulating evidence on population growth in developing countries shows that is the combination of social development and family planning that reduces fertility.     

Carbon-reducing taxes and income inequality: general equilibrium evaluation of alternative energy taxation in Taiwan

Recently, several studies have been a detailed evaluation of the economic implications of energy taxation as a policy instrument to conserve energy and reduce carbon emissions. However, little attention has been devoted to inquiring about the economic implications of energy taxation in the newly industrialized countries (the so-called NICs). In this paper, we use a multisector, multihousehold computable general equilibrium model to assess the distributional effects of alternative energy taxation on the Taiwan economy. The counterfactual simulation technique is applied to investigate the income distribution implications of: (1) an increase in the import taxes of crude oil; and (2) an increase in the excise taxes of petroleum products. Our empirical results basing on Taiwan's data show that both energy taxes increase government revenue and the Gini coefficient, but reduce net value-added, private consumption, disposable income and equivalent variation. A raise in the Gini coefficient implies that there is a worsening in the distribution of income. The lowest income group suffers relatively large welfare and income loss, but the highest income group suffers a relatively small welfare and income loss. The distributional effects differ from household to household depending on the composition of their total consumption and the source of their factor income. Our findings reveal that the energy tax appears to be mildly regressive, there are broadly consistent with those cases of developed countries reported in previous studies.     

Optimal fiscal policy in the Uzawa-Lucas model with externalities

Summary. This paper devises a fiscal policy by means of which the first-best optimum equilibrium is attained as a market equilibrium in the Uzawa-Lucas model when average human capital has an external effect on productivity. The optimal policy requires the use of a subsidy to investment in human capital which can be financed by a tax on labor income. Lump-sum taxation is not required to balance the government budget either in the steady state or in the transitional phase. Physical capital income should not be taxed. Alternatively, the optimal growth path can be attained by means of a subsidy to human capital. Received: March 21, 2002; revised version: September 4, 2002 RID="*" ID="*" Financial support from the Spanish Ministry of Science and Technology through PNICDYIT grant SEC2002-03663 is gratefully acknowledged.     

The extension of social security coverage in developing countries

We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risks. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.