Birth Rate Debate A Childish Approach to Pensions

Germany’s statutory pension scheme has no influence on the country’s low birth rate, argues the head of the Handelsblatt Research Institute.
Should we have kids to fund our old age?

Germany has been stuck in a baby trap for more than four decades now. The country’s low birth rate, combined with increasing life expectancy, is cramping our economy’s potential for growth and putting our social welfare system under pressure.

Demands for child-friendly policies or, more specifically, parent-friendly policies, are justified. But the government should only implement those policies that are based on empirical evidence. The suggestion, long propagated by some economists, of radically altering our statutory pensions scheme is not one of them.

Economists have attempted to apply market models to non-economic aspects of life, like family planning, since the 1950s.

This can sometimes be enlightening, but an economist needs to be aware of the limitations of this approach. Just as every scientist, an economist has his or her own selective perspective on the world. But paradigms and theories cannot accurately portray reality. Their function is to enable a researcher to glean specific and selective results within a certain framework.

The spiritual dean of those economists blaming Germany’s pensions system for our low birth rate is Hans-Werner Sinn. The president of Munich’s Ifo Institute for Economic Research is an excellent economist. But he unfortunately believes that neoclassical theory is enough to explain a country’s reproductive behavior and demographic developments – as well as support potential recommendations for them.

People would pay the same amount into the pension system – but only those with several children would receive a full pension.

In our pay-as-you-go pension insurance, today’s workers finance today’s retirees. The amount of a pension is roughly based on the payments into the system. The necessary requirement for this system to keep working – having children – is not being honored.

Mr. Sinn, who mistakenly believes Germany has “the most generous pensions system in the world,” believes a pension is “insurance against being childless and the poverty in old age that comes from that.” So, by extension, he blames the pension system for the country’s low birth rate. “It removes one of the most important motivations for having children,” he said.

Behind this bold thesis is that people, trusting in their state pensions, rationally decide whether it is economically worthwhile to have children or not. In his view, the present value of saving child-rearing costs discourages people from becoming parents.

In order to induce them to have more children, he demands that people with and without children pay the same amount into the pensions system – but only those with several children would receive a full pension. The childless, who would see their pensions cut drastically, would be obliged to put 6 to 8 percent of their wages into their own, private retirement plan.

 

Births in Germany-01



 

This suggestion overlooks the fact that Germany’s pensions scheme is not a holistic social security system. There are people outside of the scheme who would neither benefit nor be penalized for having or not having children. The steep pension cuts for the childless could also be considered unconstitutional.

Only by excluding these factors is Mr. Sinn’s argumentation sound – but that’s no proof of the societal relevance for this microeconomic calculation of reproductive behavior.

The countless multidisciplinary studies as to why people have children show that our statutory pensions scheme has no influence on family planning.

A recommendation for boosting the birth rate based on the empirical evidence that we have would call for forcing the equality of men and women, while making it easier to have a family and work. That means having a high-quality daycare infrastructure, implementing all-day schools and getting rid of the subsidy for taking care of children at home.

 

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