The Old Age Security Hypothesis and Population Growth
NBER Working Paper No. 372
In traditional societies it is often argued that parents' desire for old age security in the form of transfers from their children provides an important motive for childbearing. Some doubt has been cast on this "old age security hypothesis" by recent estimates which suggest that the rate of return on investments in children tend to be negative in most developing countries. This paper presents a theoretical model which integrates micro-level decision making about fertility and life cycle consumption into a dynamic macro-level model of overlapping generations in order to investigate the implications of this hypothesis. In this model, observation of a negative rate of return to children and positive population growth in a traditional society may imply (1) that the old age security motive for childbearing is, in fact, very strong; (2) that the rate of population growth is "too high" from a Paretian point of view; and (3) that each individual in current and all future generations could be made better off if the rate of population growth were lower and the level of old age consumption were increased, but that a reduction in population growth alone would reduce welfare. A social security tax and transfer policy could be devised to induce a Pareto optimal rate of population growth and distribution of life cycle consumption only if measures are taken to offset the divergence between the private and social rate of return to children created by the social security scheme.