Old‐Age Support Policy Effects on Economic Growth and Fertility

ABSTRACT Salient features of major economies around the world, specifically in high‐income countries, are graying population and declining fertility. Incorporating the quantity–quality tradeoff of children into an overlapping generations model, this paper presents an analysis of the effects of formal old‐age support on fertility and economic growth. Because of health risks during old age, which might be too severe to be covered privately, some economically developed countries have public old‐age support programs. Formal old‐age support provision is regarded as involving management costs, for instance, caused by X‐inefficiency in addition to labor costs. Findings demonstrate that when management costs are sufficiently small, formal old‐age support raises the balanced economic growth rate, involving a smaller tax burden and freeing individual time from family old‐age support, but it lowers fertility. Effects on the lifetime utility of individuals are indeterminate. By contrast, when management costs are high, the increased formal old‐age support deters economic growth through a negative income effect. However, it also lowers the fertility rate. In this case, lifetime utility becomes lower. Our major finding is that, when the cost inefficiency of public support is not high, formal old‐age support might increase long‐term lifetime welfare of individuals, but it lowers fertility.