Endogenous fertility, endogenous growth and public pension system: Should we switch from a pay-as-you-go to a fully funded system?

In this paper we study the implications of state pension plan reform on fer tility and on growth. We extend the Grossman and Yanagawa endogenous growth framework by incorporating altruism, making fertility endogenous. We inves tigate the effect on long-run growth of a switch from a pay-as-you-go (PAYG ) pension system to a fully funded system. We show that a PAYG pension syst em is associated with a lower fertility rate than a fully funded system. Th is lower fertility in turn increases the rate of growth. Hence, switching f rom a PAYG system to a fully funded system may be harmful, especially for d eveloping countries in which limited resources are heavily stressed by high fertility rates. In addition, we propose a hypothetical pension system, th e saving subsidy programme (SSP), which would yield a higher growth rate th an the PAYG system. The SSP consists of a minimum benefit level for each re tired and of a subsidy to private savings.