The sustained drop in birth rates combined with the fact that younger adults are less and less keen to have children, not to mention a large family, highlights the urgent need for a new approach to family policy. German family policy has to deal actively with demographic change and cut back on the indirect interventions in family planning that are anchored in the taxation and social security system.
On behalf of the Robert Bosch Stiftung the Ifo Institute calculated the fiscal effects of the birth of a child on taxation and the social security system in 2005. A child that was born in 2000 and behaves averagely for its entire life in terms of its education, its labour force participation, the number of offspring that it has and many other aspects, pays EUR 77,000 more in taxes and contributions than s/he receives in public goods. This fiscal externality is an important - and from an economical point of view distorting - reason for falling birth rates in Germany and other countries. This redistribution generates incentive effects, which give rise for concern that fewer children will be born than would otherwise be the case if the state were to behave neutrally. The main driver of these effects is primarily the pay-as-you-go German social security system, and above all the state pension system. The core of the problem is that the potential financial returns generated children, especially in terms of the pension system, are largely collectivized without any consideration given to the individual responsibilty of meeting the costs of educating these children that are borne by all of the parents of a given generation. The pay-as-you-go pension system, which can be seen as a form of insurance against childlessness, is therefore a fiscal redistribution from families with children to those without them. Parents therefore lose sight of the long-term impact of an additional child on their retirement provisions and, in view of the short-term costs to be incurred, opt to have fewer children instead. That is why this externality needs to be reduced via targeted family policy corrections to the present tax and social system, and especially to the pension system. With its "pension for parents" proposal, the Ifo Institute presented a concrete reform proposal that seeks to address this problem.
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Family Allowance Benefits, 2006 (Archived Table | 01.03.2007 | Details | Download)
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