DP4575 | Endogenous Fertility Policy

Publication Date

23/08/2004

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Abstract

In this Paper, we study the role of subsidies to fertility in ensuring the political viability of unfunded social security (SS). In our model, agents are heterogeneous in age and income. Young generations confront promises made previously by older generations, and in turn choose current levels of fertility subsidies, and future levels of social security benefits. We find that subsidies to the costs of children expand the set of equilibria, making social security viable where it would otherwise have to be abandoned. Moreover, the model successfully captures the observed evolution of social security and family support systems during the demographic transition. Our results indicate that the seemingly explosive evolution of SS taxes will be curbed once the underlying demographic transition is completed, after which the SS system will converge to a steady state lower than simple extrapolation of current trends would imply, and fertility will rebound with the aid of higher subsidy levels.