Endogenous fertility, externalities, and efficiency in old-age pension systems

Due to falling fertility and rising life expectancies, a serious financial crisis is looming over the pay-as-you-go pension systems established in many developed countries. The present study demonstrates that falling fertility can partly be explained by the fiscal externalities arising from the bad design of established pay-as-you-go pension systems. It is shown that these externalities also arise, in ill-designed funded systems and that for both types of pension systems one can construct variants that internalize these externalities and result in a Pareto improvement.