Following on from Richard Wellings’ post on the welfare state and saving, perhaps I can comment on the welfare state and babies. Pay-as-you-go pensions systems rely on children to make payments to the elderly. We get such systems in the private sector – operated within families and based on bonds of trust. Throughout much of history – and indeed throughout much of the world today – families have children to provide for them in old age. In countries with poor property rights regimes, this is a sound decision (putting aside for a moment, non-economic reasons for having children). It creates a unit of solidarity within which economic risks can be shared and, crucially, which can facilitate inter-generational transfers.
Intergenerational transfers within families (that is the younger generation working and helping to look after the older generation) cannot be expropriated in the way that the property accumulated in capital accounts can be. No wonder they are a popular means of providing for old age in under-developed countries.
In countries without a welfare state but with good property rights protection, families can make their own decisions. They can decide whether to have more children, accumulate capital with which a pension can be bought or combine the two.
In countries with a welfare state, however, children become “public goods”. My children will pay your pension and your children will pay my pension. The usual public good condition of “non-excludability” has been artificially created. Nobody has any direct incentive to either save (because we get retirement provision from the state) or to have children (because in the state pay-as-you-go system, as opposed to the family one, we can all rely on everybody else to have children – so nobody does!).
I can see some of my Christian friends flying into a rage and accusing me of regarding children as purely economic units. But, my point is more subtle. In a free society, with a minimal welfare state, families will take decisions regarding having children for a range of reasons. Ensuring economic security can form part of our reasoning. Sometimes people will not be able to disentangle the reasons they have children themselves – we do not necessarily sit down and make rational calculations. However, a pay-as-you-go state pension scheme provides strong financial incentives to take one particular course of action. Do people respond to incentives in this way? Yes they do. One of the authors of our monograph, Pension Provision: Government Failure Around the World, provides convincing evidence.