Abstract

A PAYGO system may serve as insurance against not having children and as an enforcementdevice for ungrateful children who are unwilling to pay their parents a pension. In fact, the latter wasBismarck’s historic motive for introducing this system. It is true that the PAYGO system reduces theinvestment in human capital, but if it is run on a sufficiently small scale, it may nevertheless bringabout a welfare improvement. If, on the other hand, the scale of the system is so large that parentsbequeath some of their pensions to their children, it is overdrawn and creates unnecessarily strongdisincentives for human capital investment.D2003 Elsevier B.V. All rights reserved.