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Study shows link between pension systems and falling birth rate

[Translate to Englisch:] Generationen
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Economists at the KU and the University of Hanover have looked into an unexpected effect of pension system: a falling birth rate. This means that the introduction of pension systems, which are actually intended to combat poverty, could paradoxically contribute to an ageing population. The results of the study, which was conducted using Brazil as an example, shed new light on the long-term demographic and economic consequences of pension insurance programs.

When pension systems are introduced in developing and emerging countries, "for understandable reasons [researchers] always look at the 'direct effect', i.e. how well this reduces poverty", says Prof. Dr. Alexander Danzer. In a study that he conducted together with Dr. Lennard Zyska from the University of Hanover, the holder of the Chair of Economics/Microeconomics at the KU Ingolstadt School of Management has now set a different focus: "We investigated the effect on the number of children born. This allows us to show that, ironically, the pension system itself can contribute to the ageing of a society, as it reduces fertility – and thus the future contribution base of all pay-as-you-go pension systems."

A long-standing theory is that children used to have to pay for their parents' old-age provision. The two economists looked for ways how the validity of this hypothesis could be put to the test. To this end, they took a closer look at the introduction of a comprehensive and financially lucrative pension system in Brazil. This country was chosen because a reform of the pension system there was carried out "with an experimental character", which provided the researchers with a significant data situation for the study: "While employees in metropolitan areas have been paying into a state pension system for several decades, employees and the self-employed in rural areas of Brazil only gained access to state pensions with the constitutional reform of 1991", explains Danzer. This inequality resulted in a so-called treatment group for the researchers, namely the rural population, and a control group, the urban population. "In a country where all citizens would have had access to a uniform pension at the same time, such a study would not have been feasible."

Zyska and Danzer
Lennard Zyska and Alexander Danzer

Comparing women from urban and rural areas showed that the number of children per woman aged 45 fell by an average of 1.3 children after the reform – and therefore decreased to less than four children per woman. "This is accelerating the decline in birth rates in rural Brazil, which has been going on for decades anyway." In the long term, an even greater adjustment was to be expected for younger women, explains Danzer: "Older women already had children before they might have considered that fewer children could be desirable because of their pension." According to the findings of Danzer and Zyska, by reducing the number of children per woman, the Brazilian pension system has itself contributed to the ageing of the population: "This has undermined the 'future contribution base' of the pay-as-you-go pension system and thus calls into question how sustainable the social policy reform actually is. The World Bank has long recommended that all countries set up several pillars that together could support a modern pension system."

According to Danzer, an essential addition was funded pension schemes, in which individuals pay into a pot that later feeds their own pension. "This can be organized by the state, companies or privately. In the low-interest phase, however, some of these funded pensions have generated low returns." The stock market, on the other hand, offers an opportunity for higher returns, "but it always represents a risk for pensions".

According to Danzer, a good pension system requires several components. Relying exclusively on a pay-as-you-go system in times of shrinking populations is dangerous. "Most countries therefore need to reform their pension systems. Our research aims to raise awareness of the fact that unintended side effects of such reforms must also be taken into account and anticipated."

Alexander Danzer / Lennard Zyska: Pensions and Fertility: Micro-Economic Evidence. In: American Economic Journal: Economic Policy, 2023, vol. 15 (2): p. 126-165.

 

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