Two scenarios of the evolution of modern pension systems

Abstract

In 1958, Paul Samuelson published a paper entitled “An exact consumption-loan model of interest with or without the social contrivance of money” (Samuelson, 1958), which is widely recognised as having laid the theoretical foundations for pension economics. It is seen as providing a sort of theoretical groundwork for the scheme referred to as the pay-as-you-go pension system. Samuelson asserts that it is impossible to find an optimal solution for old-age consumption on a market basis in an economy without money and opportunities to set aside reserves, and that a Hobbes-Rousseau style of social contract is therefore required (as embodied in the modern system of social insurance institutions), according to which active generations support the older generation that they follow and, likewise, will be supported by the next generations, who are in childhood or have not even yet been born. In his model, Samuelson does not talk about child-rearing; he does not even include childhood in his model. He puts the cost of raising a child at zero, even though he admits that a sufficient number of children is required to maintain modern social insurance. This paper tackles the question of what pension system will result if Samuelson’s simplified assumption about children is removed and his model is extended to include childhood. The outcome is surprising: on basically the same foundations, a completely different scenario can be built, which would result in a system that is very similar to the present-day pension system but deviates from it in one or two significant ways. These two scenarios – this new system and Samuelson’s, respectively – are here called the “IAI” (inactive-active-inactive) scenario and the “AI” (inactive-active) scenario; the investigation focuses on how the pension systems predicated on these two scenarios resemble each other and where they differ. The most important element in the IAI scenario, which can be considered a modernised version of what Samuelson calls the “traditional pension system” (where children were the means of old-age support) that went out of fashion, is that the pension contribution should not be considered here as a sort of investment, giving entitlement to subsequent pension, as Samuelson does in his AI scenario. Instead it is treated as repayment, organised by the state and due to parents for raising children; similarly to the “traditional pension system”, this secures their sustenance in old age (i.e. their pension). This is also a social contract; however, only parents who have raised children will be eligible for a pension under this contract. Those who do not do so will save on the costs of childcare, and the state must organise for them another type of pension system, a funded one in which the childcare costs saved are put aside and from which their pension is drawn. The conclusion of this paper includes a review of approaches published to date in the literature, which treat the problem of pension and child-rearing in ways differently than here.