The advantages and the disadvantages of the child-related compensatory pension system

Abstract

In bulk of the pension systems the public pillar is dominant if not exclusive, or at least the pension system has a strong pay-as-you-go pillar (from now on PAYG), for example, in Hungary also. But the fairness of these pension systems is questionable if the country's population has had a negative demographic dynamic for a longer time: if the population is aging (low fertility coupled with longer life expectancies) and/or if there is a significant imbalance between the successive generations' numbers. In Hungary, these demographic problems appear all at once. In 20 years a populous generation will retire and will leave behind a much lower number of active aged children, consequently, the number of childless people among pensioners will increase. The PAYG pension system can not be {\FIix fair} for certain groups, among others to agents who have children along with such demographic trends. Because the amount of the pension benefits depends on the working years and the average wage during the lifetime, and thus, indirectly, childbearing is punished. As a result, the current calculation method of pension favours those without children.

In Hungary, the long-term lifetime cost connected to childbearing, the so-called motherhood pay gap is significant and causes severe costs in retirement age. According to the MNB (2022) calculation based on data of the Hungarian State Treasury, the initial pension benefits of a woman with two children is lower by 15 percent and of a woman with three children is lower by 20 percent than the pensions of childless women in average. Because of this fact, many different child-related pension reform proposals were introduced in the Hungarian pension literature. For example, among others Regős (2015) suggests a type of child-related pension system, in which the amount of pension would depend on the number of children the pensioners brought up and Banyár (2021) has an idea about a pension system funded with human capital, in which the pension of agents with children depends on the human capital of the raised, new, working generation. According to both articles, these pension reforms could increase fertility also. However, to our knowledge, no study has yet been published about such modification of the present PAYG system, in which the pensions compensate for the long-run labour market costs of childbearing for the agents with children.

In this paper, we introduce a new approach to a possible child-related pension system. We call this idea a {\FIix compensatory pension system}, in which the pensions compensate the forgone working time related to childbearing: the time and efforts the parents spent on bringing up children. We built up a dynamic general equilibrium model in an overlapping generations framework (calibrated on the basis of Hungarian data) to investigate the effects of our pension proposal. We compared the effects of the present PAYG system to the effects of this child-related compensatory pension scheme. The evaluation of the pension systems was based on the pensions of representative agents (with or without children) and their development of the macro aggregates over time. Furthermore, we used a new utility element in the well-known model frame to express the long-run labour costs of childbearing: during the first active period, the consumer had already accumulated some experience, and during the second active period, only acquiring additional skills incurs some additional cost. In other words, the one, who was able to accumulate more skills in the first period, felt less exhausting to further develop them in the second period.

According to our model results, the compensatory pension system would be a very costly solution in the long run: the fiscal policy decision maker would be able to maintain only lower debt to GDP ratio, and the consumption of both types of consumers (with or without children) would be lower. However, the proposed pension scheme could reach its primary goal: the pension payments of the agents with and without children would really be close to each other. The compensatory pension system would have a minimal positive effect on the average number of children and the time spent with children. All in all, the decrease in the labour market efficiency and the lower real wage would hold back the increasing effect of the compensatory pension system on lifetime income. In the short term, the effect of the compensatory pension system appears deceptively positive, because, after its introduction, the pension and thus the lifetime consumption of the agent with children would immediately increase. Additional demand would encourage higher output, which would condense into an increase in the real wage. Furthermore, additionally, thanks to the higher real wage, it would raise even the consumption of the economic agent without children, who is not the beneficiary of the compensatory pension system.

However, the proposal has costs, the budget balance would immediately show a deterioration. In the long term, the positive picture changes and the compensatory pension system would lead to a decline in the macroeconomy. The main question is whether we can really call a pension system fairer which achieves the set goal with the deterioration of almost all macro aggregates.