Substitute Goods: Children and Pensions?

A few days ago, I wrote up a little piece discussing the ineffectiveness of China's Two-Child Policy. Today I want to discuss the economics involved at a micro-level. Why do couples decide to have children?

Children represent an investment, and like any investment, it involves a trade-off. Money spent on children is money that can't be spent on other things. Those things can be fancy meals or shoes or they can be things like life insurance or an annuity. The main economic reason for having children is that they're an asset able to support their parents in old age. Such support, however, is not guaranteed.

Children can be ungrateful. Even if they do prosper, you've no guarantee they'll do the right thing and provide for you in your dotage. Furthermore, there's no guarantee they will succeed in life. Indeed, they might not make it very far in life at all.

For example, say you live in a society where children provide for their elderly parents. If they don't, society will ostracize them. In such a society, when a couple are deciding how many children to have, they only have to think about one two things: how likely is a child to make a good living (enough to support us in comfort), and how likely is it for a child to survive.

Furthermore, let's suppose parents are willing to accept some risk. They don't demand a 100% guarantee. They require something more like a 90% guarantee.

If the answer is they're guaranteed to make a good living and they're guaranteed to survive to a ripe old age, then it makes sense to have one child.

But suppose only 50% of children make something of themselves in the world. In that case, it makes more sense to have an heir and a spare, to diversify your portfolio as it were.

Why do birthrates decline in developed economies? Maybe the reason is that they provide old age pensions, which make it unnecessary for couples to invest in children. Interesting idea. Hard to test. So let's see if there is at least a correlation. If there is, then maybe this merits some further examination.

According to the CIA, these are the countries/dependencies with the lowest birthrates:

Monaco
Saint Pierre and Miquelon
Andorra
Japan
Puerto Rico
Slovakia
South Korea
Taiwan
Greece
San Marino
Macau
Italy
Singapore
Germany
Bulgaria
Bosnia
Croatia
Romania
Hong Kong
Portugal 

Ok, how does that compare to the social insurance provision? How to measure? Good question. Let's start with the ranking put out by Global Age Watch. Here are the top twenty countries to grow old in:

Switzerland
Norway
Sweden
Germany
Canada
Netherlands
Iceland
Japan
United States
United Kingdom
Denmark
New Zealand
Austria
Finland
Ireland
France
Australia
Israel
Luxembourg
Panama

The only overlap in those two sets is Japan and Germany. So let's see if there's a correlation between high birthrates and the worst countries to grow old in,

Top Twenty Countries/dependencies by birthrate:

Angola
Niger
Mali
Uganda
Zambia
Burundi
Brukina Faso
Malawi
Somolia
Liberia
Mozambique
Afghanistan
Nigeria
Ethiopia
Sierra Leone
Tanzania
Chad
South Sudan
Cameroon
Guinea

And now for worst countries to grow old in:

Afghanistan
Malawi
Mozambique
West Bank and Gaza
Pakistan
Tanzania
Zambia
Rwanda
Uganda
Iraq
Nigeria
Jordan
Morocco
Lao PDR
Honduras
Ghana
Cambodia
Greece
South Africa
Republic of Moldova

In both those sets are: Uganda, Zambia, Malawi, Mozambique, Afghanistan, Nigeria and Tanzania. Which is a bit better. Besides, the data so far is a bit plausible. After all, we don't just have children so we have someone to provide for us in old age. There are certain intrinsic joys to raising children.

But there is one anomaly: Greece. Greece is one of the worst countries to grow old in but it also has one of the lowest birthrates. Anyways, something to think about. Thanks for reading!