Social Security, Child Support and Fertility

Mikko Puhakka1, Matti Viren 1
1University of Pennsylvania, USA, 2University of Turku, Finland

We investigate the effect of government policies on fertility behavior in a model in which children are mainly seen as investment goods. To illuminate that effect we construct a simple exchange economy overlapping generations model with a private insurance scheme along with a public social security system. In the private system parents can invest in children and benefit from their support (care and income support) in the old age. An introduction of the public system will lower the incentive to have children, i.e. the fertility will be lower. This is an important negative externality of public pension system. We test some of the model's basic implications using long historical panel data from 11 countries for the period 1750-1995. In addition, we use two other data sets, the WDI (World Bank) and MZES (Manheim University) to reinforce the empirical results that are obtained with historical data. These analyses show, opposite to common beliefs, that there is a positive relationship between ageing and fertility if we control for the key determinants of fertility (size of the public sector, level of income, education and infant mortality). By contrast there is a strong negative relationship between (various indicators of) social security and fertility. The same is true for income and education while the fertility effect of infant mortality is clearly positive. Some empirical support is found for the notion that child support increases fertility.

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