On the Role of Pension Systems in Economic Development and Demographic Transition

In this paper we examine whether different pension systems affect the set of initial human capital conditions capturing an economy in a low steady state equilibrium income. To analyze this problem, we employ a three period overlapping generations model where fertility and investments into the children's education are chosen endogenously. We show that education investments are higher and start at lower income levels for a pay-as-you-go pension system economy compared to an informal, fertility related one. The income threshold needed to escape the "poverty trap" is therefore lower if a pay-as-you-go pension system is employed. Moreover, unless the economy is caught in the low income steady state, a pay-as-you-go pension system supports higher equilibrium income. We further highlight that pension systems influence the timing of demographic transition through their different valuation of fertility, contributing to the explanation for observed differences between developed and developing countries.