This paper discusses the efficiency of a pay-as-you-go pension reform by introducing a child benefit in an endogenous fertility setting. In the model of a small open economy, higher fertility is associated with a reduction of lifetime labor supply. The optimum share of fertility-related pensions is always below unity, but generally positive. The former is true since individuals do not take into account the impact of their labor supply choice on the parent generation. It is demonstrated that child allowances are equivalent to fertility-related pensions as instruments to achieve an efficient allocation.
public pensions pay-as-you-go fertility externalities