PAYG pensions, tax-cum-subsidy and optimality

Fanti, Luciano and Gori, Luca (2010): PAYG pensions, tax-cum-subsidy and optimality.

Abstract

Using a simple OLG small open economy with endogenous fertility we show that the command optimum can be decentralised in a market setting using both a PAYG transfer from the young (old) to the old (young) and a tax-cum-subsidy (subsidy-cum-tax) policy, to redistribute within the working age generation. The latter instrument, in fact, reduces (increases) the opportunity cost of bearing children and, hence, stimulates (depresses) fertility. The policy implications are straightforward: when PAYG transfers exist and child rearing is time consuming, a tax-cum-subsidy (subsidy-cum-tax) policy can be used to internalise the externality of children, while also representing a Pareto improvement.

• Item Type: MPRA Paper
• Language: English
• Keywords: Overlapping generations; PAYG Pensions; Small open economy; Tax-cum-subsidy
• Subjects: J - Labor and Demographic Economics > J1 - Demographic Economics > J13 - Fertility ; Family Planning ; Child Care ; Children ; Youth; H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J26 - Retirement ; Retirement Policies

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