What is the child-related compensational pension system good for and what is not?

Abstract

There is increasing attention to the sustainability and fairness of the pay-as-you-go pension system as a consequence of the aging society and the imbalance between the old and the young generation’s number. In this system, the pension depends only on the previous contribution, which indirectly punishes childbearing. The purpose of this article is to compare the effect of the present Hungarian regulation to a possible child-related compensational pension scheme, where the amount of pension takes into account the childbearing time. The evaluation of the pension systems is based on the lifespan utility of representative agents (with or without children) and the economic effects of the possible pension reform. We built up a dynamic general equilibrium model in an overlapping generations framework (calibrated on the basis of Hungarian data) to investigate the effects of our pension reform proposal. As a result we receive that such a pension system could increases the utility of the consumer who has children by 0.2149% percent, but decrease the steady state utility of childless consumer by 0,0130% percent. The amount of children and the time spent with children increase slightly, but these positive elements that could have raised the output does not compensate the negative effect of the decreasing work-related efforts, so the output falls.