Longevity, fertility and PAYG pension systems sustainability

Recently Fanti and Gori (2008) showed - in the basic overlapping generations (OLG) model of neoclassical growth with exogenous fertility (Diamond, 1965) - that a positive relationship between longevity and pay-as-you-go (PAYG) pensions may exist independently of the size of the contribution rate burdening on the currently active generation (the young workers). We extend such a model to analyse how the balanced PAYG pension budget is affected by an increasing longevity in a fairly standard Diamond-style OLG model with endogenous fertility. It is shown that the positive relationship between longevity and pensions may be thought to be a robust feature of OLG economies. In particular, (1) the demand for children may either increase or decrease along with an increased longevity, though the latter is not very likely, and (2) the endogeneisation of fertility rates may strengthen or weaken the beneficial effects that the reduction in adult mortality plays on PAYG pensions, and this result depends exclusively on the size of the households' preference for raising children. Therefore, even in a context in which agents choose endogenously the number of children raised, there would be room for an increase, rather than the often threatened reduction, in future pensions by keeping unaltered the contribution rate to the PAYG scheme paid by current workers, and this holds especially in the case in which parents have a strong preference for having children.