Pension design when fertility fluctuates: The role of education and capital mobility

This study compares alternative designs of an unfunded pension system. Convex combinations between a fixed contribution rate and a fixed benefit rate are considered. The objective is to maximize the expected ex ante welfare under stochastic fertility. The model is a three-period CGE framework where the financing of education and effects on factor prices are accounted for. Factor prices depend on the degree of capital mobility. For low degrees of capital mobility, it is optimal to have a fixed benefit rate in the pension system. But for the small open economy, a fixed contribution rate is optimal if the education system has a fixed benefit rate. In this case individuals in the small open economy are unaffected by fertility fluctuations.