Pension system and fertility 

In societies with heavy pension deductions, fertilities are usually very low, much lower than the replacement rate. This causes population aging and social decline. In this short note, we will use some quantitative examples that may clarify related issues.

Suppose there is no pension system. Every family takes care of themselves. Suppose a person lives to eighty years old, and each generation is twenty years apart. For simplicity, we assume each person has only one parent. For the first twenty years, she depends on her parent. For the last twenty years of her life, she depends on her daughter. From twenty to sixty, she works to support herself and her family. Specifically, from twenty to forty, she supports herself and her daughter. From forty to sixty, she supports herself and her mother. Such a social system can be sustained indefinitely.

We can further quantify the discussion. Suppose a person’s cost of living is two dollars a year all her life. She makes four dollars a year while working. Overall she spends two dollars per year times eighty years for a total of one hundred sixty dollars in her life. She makes four dollars per year times forty years for a total of one hundred sixty dollars in her life. The expenditure equals income over her lifetime. 

Now the government wants to establish the pension system. This is to help out those seniors without children. In the pension system, each individual will pay 25% of her income, or one dollar for every four dollars earned, while she is working. She will be paid 50% of her work time income at retirement. In our case, she will pay one dollar a year to the government from twenty to sixty and get paid two dollars per year from sixty to eighty. Nothing seems changing. Yet every senior get covered, with or without children.

But there is a fundamental change. In the pension system, every senior get covered, with or without children. This means that people who don’t bear the cost of raising children will enjoy the same retirement benefits. This will greatly discourage the population from raising children. Indeed, one of the major goals of introducing the pension system was to reduce the fertility rate at a time of high fertility rates. This goal was achieved with great success, too great success.

The very goal of introducing the pension system is to help the seniors without children, at a cost of seniors with children. Equivalently, the very goal of introducing the pension system is to reward the seniors without children, and punish seniors with children. Fertility rates naturally drop in response to this incentive. The degree of fertility decline corresponds to the strength of this incentive system. Over the years, the pension deduction rates have been increasing in Canada. Naturally, the fertility rates have been declining, now below 1.5 children per woman.

Any system with below replacement fertility rate is unsustainable. Pension system, as part of the social system, is unsustainable if the whole system is unsustainable. If so, why the Canadian government keeps increasing pension deduction rates year after year? Why the Chinese government, having witnessed the dismal failure of the pension system, adopted an aggressive pension deduction scheme in China? This is because pension system is really a camouflaged tax system. Government officials and their handlers benefit greatly from the enormous pension deductions.