Europe’s Demographic Deficit A Plea For A Child Pension System

Summary This paper considers the economic implications of the stalling birth rates and demographic development in Europe. To remedy for this it proposes a child pension system. This system allows additional pension facilities depending on the number of children raised. It should be a PAYG pension financed with an income tax. The main motivation for this is that parents have invested resources which also benefit society.18th Tinbergen Lecture, Amsterdam, October 22, 2004Ifo Institute for Economic Research at the University of Munich.I am grateful to Lans Bovenberg and Peter Cornelisse for useful conversations about the Dutch pension system and Tinbergens views on children and pensions. I thank Robert Koll, Regina von Hehl and Elsita Walter for careful research assistance, and Tobias Seidel, Michael Stimmelmayr, Martin Werding and Markus Zimmer for useful comments.     

Why a Funded Pension System is Needed and Why It is Not Needed

Based on explicit presentvalue calculations, the paper criticizes the view that the PAYGOsystem wastes economic resources. In present value terms, thereis nothing to be gained from a transition to a funded systemeven though the latter offers a permanently higher rate of return.The sum of the implicit and explicit tax burdens that resultfrom the need to respect the existing pension claims is the sameunder all systems and transition strategies. Nevertheless a partialtransition to a funded system may be a way to overcome the currentdemographic crisis because it replaces missing human capitalwith real capital and helps smooth tax and child rearing costsacross the generations.     

The limits to competition between economic regimes

Inaugural lecture at the University of Vienna, January 10, 1990.     

EU Enlargement, Migration, and Lessons from German Unification

The paper studies the role of international implications after EU enlargement. Based on a formal model with migration costs for both capital and labor, it predicts a two-sided migration from the new to the old EU countries which is later reversed. As the migration pattern chosen by market forces turns out to be efficient, migration should not be artificially reduced by means of legal constraints or subsidies to the new member countries. The paper draws the parallel with German unification and points out the lessons to be learned by Europe. The analysis concludes with a brief discussion of the second-best problem posed by the existence of welfare states in the old member countries.     

Pollution, Factor Taxation and Unemployment

When consumers choose between clean and dirty goods and the labour market clears, a green tax reform may not bring about a double dividend in the sense of increasing environmental quality and increasing employment. However, when firms choose between clean and dirty factors of production, and when there is unemployment, such a result is very likely to occur. The paper investigates a model of a monopolistic firm where labour and energy are factors of production and trade unions negotiate the wage rate, accepting some unemployment as a result of aggressive wage demands. It is shown that, in such a framework, a green tax reform will boost employment provided it does not increase the net-of-tax wage rate by too much. This is the case when the elasticity of substitution between labour and energy is greater than one, equal to one or not too far below one.     

Sufficient conditions for dynamic path controllability of economic systems

In this paper sufficient conditions for target path controllability of dynamic economic systems in state-space representation are discussed. These conditions, though stronger than necessary, are much easier to verify than the well-known (but complicated) necessary and sufficient conditions for target path controllability. It is demonstrated that the computational gain in terms of practical application of the technical conditions is substantial. For example, by means of these conditions it is possible to prove the target path controllability of Buiter's 1979 rational expectations model of an open economy — a problem which has been an unresolved one up to now.