A PAYGO system may serve as insurance against not having children and as an enforcement device for ungrateful children who are unwilling to pay their parents a pension. In fact, the latter wasBismarck’s historic motive for introducing this system. It is true that the PAYGO system reduces the investment in human capital, but if it is run on a sufficiently small scale, it may nevertheless bring about a welfare improvement. If, on the other hand, the scale of the system is so large that parents bequeath some of their pensions to their children, it is overdrawn and creates unnecessarily strong disincentives for human capital investment.
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