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Following on from Richard Wellings’ post on the welfare state and saving, perhaps I can comment on the welfare state and babies. Pay-as-you-go pensions systems rely on children to make payments to the elderly. We get such systems in the private sector – operated within families and based on bonds of trust. Throughout much of history – and indeed throughout much of the world today – families have children to provide for them in old age. In countries with poor property rights regimes, this is a sound decision (putting aside for a moment, non-economic reasons for having children). It creates a unit of solidarity within which economic risks can be shared and, crucially, which can facilitate inter-generational transfers.

Intergenerational transfers within families (that is the younger generation working and helping to look after the older generation) cannot be expropriated in the way that the property accumulated in capital accounts can be. No wonder they are a popular means of providing for old age in under-developed countries.

In countries without a welfare state but with good property rights protection, families can make their own decisions. They can decide whether to have more children, accumulate capital with which a pension can be bought or combine the two.

In countries with a welfare state, however, children become “public goods”. My children will pay your pension and your children will pay my pension. The usual public good condition of “non-excludability” has been artificially created. Nobody has any direct incentive to either save (because we get retirement provision from the state) or to have children (because in the state pay-as-you-go system, as opposed to the family one, we can all rely on everybody else to have children – so nobody does!).

I can see some of my Christian friends flying into a rage and accusing me of regarding children as purely economic units. But, my point is more subtle. In a free society, with a minimal welfare state, families will take decisions regarding having children for a  range of reasons. Ensuring economic security can form part of our reasoning. Sometimes people will not be able to disentangle the reasons they have children themselves – we do not necessarily sit down and make rational calculations. However, a pay-as-you-go state pension scheme provides strong financial incentives to take one particular course of action. Do people respond to incentives in this way? Yes they do. One of the authors of our monograph, Pension Provision: Government Failure Around the World, provides convincing evidence.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

6 thoughts on “The missed-conceptions of the welfare state”

  1. Posted 29/06/2009 at 10:32 | Permalink

    One of the problems for a reasonably well-off parent is trying not to ’spoil’ teenage children, even when one could obviously afford to do so. In other words, part of being a parent is letting children grow up into independent responsible adults.

    The UK state is on the brink of bankruptcy. It permits about 20 per cent of children to leave the state schooling system virtually illiterate and innumerate. It seems to positively welcome everyone being ‘dependent’ on political decisions made collectively.

    While it makes sense for adult tax-payers to have a vote, that is, a say in how their money is spent, why should tax-receivers?

  2. Posted 29/06/2009 at 10:32 | Permalink

    One of the problems for a reasonably well-off parent is trying not to ’spoil’ teenage children, even when one could obviously afford to do so. In other words, part of being a parent is letting children grow up into independent responsible adults.

    The UK state is on the brink of bankruptcy. It permits about 20 per cent of children to leave the state schooling system virtually illiterate and innumerate. It seems to positively welcome everyone being ‘dependent’ on political decisions made collectively.

    While it makes sense for adult tax-payers to have a vote, that is, a say in how their money is spent, why should tax-receivers?

  3. Posted 30/06/2009 at 10:57 | Permalink

    Still, if the state stepped out of the pension business in the developed world, I would hope that the share of private savings in providing for old age would approach 100%, and that the share of having children for this end would approach 0%. If parents have children for economic reasons, even if that is just one factor among many and if it’s purely unconscious, then I don’t believe these children will be very happy ones. If economics play any role at all, it still means that there will be ‘marginal parents’ who would otherwise not have wanted children.

  4. Posted 30/06/2009 at 10:57 | Permalink

    Still, if the state stepped out of the pension business in the developed world, I would hope that the share of private savings in providing for old age would approach 100%, and that the share of having children for this end would approach 0%. If parents have children for economic reasons, even if that is just one factor among many and if it’s purely unconscious, then I don’t believe these children will be very happy ones. If economics play any role at all, it still means that there will be ‘marginal parents’ who would otherwise not have wanted children.

  5. Posted 30/06/2009 at 11:17 | Permalink

    I think this is just a bit too rationalist-constructivist, Kris. I think it is reasonable for families to think of themselves as social units and take decisions (often without rationalising the process) which both build and assume bonds of reciprocity within the family. Of course, they should not use moral blackmail when the child is older: “you can’t leave home Fred because we only had you to pay for your mother’s pension!”. But, I think these tacit, informal bonds are important and if they all disappeared to be replaced by capital accounts much would go with them. Would you say the same about personal care for the elderly (which even if Britain is 70% provided by family and friends)?

  6. Posted 30/06/2009 at 11:17 | Permalink

    I think this is just a bit too rationalist-constructivist, Kris. I think it is reasonable for families to think of themselves as social units and take decisions (often without rationalising the process) which both build and assume bonds of reciprocity within the family. Of course, they should not use moral blackmail when the child is older: “you can’t leave home Fred because we only had you to pay for your mother’s pension!”. But, I think these tacit, informal bonds are important and if they all disappeared to be replaced by capital accounts much would go with them. Would you say the same about personal care for the elderly (which even if Britain is 70% provided by family and friends)?

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