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

In this paper we examine whether di¤erent pension systems a¤ect 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 over- lapping 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 econ- omy 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 sys- tem is employed. Moreover, unless the economy is caught in the low income steady state, a pay-as-you-go pension system supports higher equilibrium in- come. We further highlight that pension systems in?uence the timing of de- mographic transition through their di¤erent valuation of fertility, contributing to the explanation for observed di¤erences between developed and developing countries.