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Vlasov A.V. Pension System as a Demographic Recession Factor

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Introduction
The article looks into the distribution pension system impact on birth rate. It is
surprising that pension system analysis seldom considers the way the system
influences on people’s action. Usually it is analyzed if this or that kind of pension
system can provide the necessary income level of the pensioners, and how
financially sustainable this or that system is. The Austrian economic school
methodology application allows analyzing the system impact on people’s actions as
well as social relation evolution and public morals using the economic science.
Literature review
A number of scientists have already voiced the hypothesis that pension system
influences on the birth rate decrease. For example, in 1976 the demographer Borisov
(1976) pointed out that birth rate is economically motivated, and “social insurance
system development is decreasing the dependence of the ill and elderly people on a
number of children or on their availability. The children, being a kind of insurance,
are becoming unnecessary in the old age”. Despite the importance of this idea for
economics it has not been massively supported by scientists-economists. This fact
causes regret, but not surprise, taking into account that a big part of the economists
is employed by educational establishments controlled by state. Consequently most
of their activity is scientific conclusions to ground the ideas beneficial for the state
and the officials. The officials are unlikely to like the conclusion that negative trends
in the society resulted from their activity.
Akparov (2012) and Geleransky (2013 and 2015) are to be singled out among the
Russian researchers studying the interconnection of the pension system and birth
rate. They consider it is necessary to establish a rigid connection between a number
of children and their income and pensions of those who raised them. This measure is
grounded by the logical analysis, i.e. a priori method. The mentioned above
hypothesis was also logically analyzed by the author of this article (Vlasov, 2012;
Galooyek et al., 2014; Kossova et al., 2014; Vovchenko et al., 2017; Guskova et al.,
2016; Cristea and Thalassinos, 2016; Tcvetkov et al., 2015). Besides it is necessary
to mention Goncharova’s research (2012) published in the Internet in 2012, where
the impact of the pension system on the birth rate reduction on the basis of the
statistical data is grounded.
Research Methods
To analyze this hypothesis the following methods are used.
Apriorism, logic method: all conclusions logically follow from the certain
assumptions about human activity that do not require verification.
Methodological individualism: according this principle all results of human activity
are to be explained or understood in terms of the individual’s actions. Any social
phenomenon is a result of conscious choice of a number of people. This method is
A.V. Vlasov
445
also connected with the induction method and apriorism because it means logical
transition from private to general.
Subjectivism: This method means that it is necessary to analyze human activity or
institutions on the basis of that subjective significance that an analyzed individual
applies to this action. This principle suggests that those goals and means the
individual chooses are subjective, but it is a rational choice, because a person
chooses the most suitable from his/her point of view means to achieve its subjective
goals. Consideration of economic processes in the real time means, that
consequences of any taken decisions and people’s actions are not manifested
instantly but in the course of time. On the other hand, people are able to analyze the
results of the past actions and correct their future actions. It results in rational
models of behavior due to the fact that resources are limited in relation to people’s
endless needs, but people are able to learn from their own mistakes.
Consideration of processes in the real time also suggests that imposed social
institutions such as pension system in the course of time distorts the individuals’
rational choice, who due to the pressure of rationality cannot take into account those
incentives the introduced system gives them. In other words the individuals adapt
their behavior adjusting it to the “artificial” (imposed) reality forced by the state.
Those individuals who due to the subjective reasons refuse to adapt their behavior to
the changed reality turn out to be less effective from the other society members’
views.
Austrian capital theory: According to the Austrian economic school, capital means
any intermediate phase of human activity (De Soto, 2008). Human activity is always
purposeful. Any person determines his/her own goals and means. “Goals and means
are not “given” but they appear from people’s entrepreneurial activity” (De Soto,
2008; Pociovalisteanu and Thalassinos, 2008). Several stages are often involved to
achieve the goal, each of which forms an intermediate good. This good is not able to
satisfy the final human need, but it is valuable because it helps achieve the ultimate
goal. The capital good is an intermediate good needed to achieve the ultimate goal.
Results
1. The impact of the distribution pension system on the economic
incentives for the population reproduction
The distribution pension system is a pension system where the fees paid by the
employed citizens are the source of pension payments. In other words the funds paid
by the working people are not invested but are used to pay current pensions. Such
system is based on the violent confiscation and redistribution of the funds among the
citizens. The institution of the distribution pension system has not appeared due to
spontaneous social development (the institution of exchange, money, market
economy, etc appeared in such a way) but was imposed by the state. Due to this fact
this institution can be called an artificially developed by humans. It dates back to the
early XX century which means that in terms of history it is rather recent. The
institution has been functioning only last hundred years, while human history counts
Pension System as a Demographic Recession Factor
446
several thousand years. To understand how pension system has influenced the
family institution and birth rate in particular it is necessary to analyze social
relations before the artificial introduction of the pension system.
One of the reasons of the wrong assessment of the consequences of the distribution
pension system is that the analyzed society is represented by two classes: working
people and pensioners. This methodology, formed by the XIX century economists,
rigidly divides the society into classes excluding the fact that the individual’s role
can change. But what is more important, it does not take into account the
development of any processes in the course of time (but this very fact brings about
the change of the individual’s role). The reason of the mistaken conclusions in
relation to the social consequences of the pension systems resulted mainly from the
methodological mistakes. The use of the Austrian economic school methodology
allows presenting the society not just as aggregate of the interacting classes but as
constantly changing in time people’s generations. The number of each present
generation is a result of choice and purposeful actions of the past generations. And
the number of future generations will be the consequences of the people’s actions at
present.
Each person independently takes a decision whether to start a family or not and how
many children to rise. As any activity the formation of the future generations
demand certain expenditures, i.e. the use of the resources to achieve other goals.
Thus, the future generation formation requires the refusal from meeting other
objectives. On the other hand, there is an objective reality where a person cannot
remain able-bodied for the whole life, i.e. there will be an inevitable period when a
person will not be able to provide the needs with his/her labor.
Figure 1. Future generation formation
Before the pension system introduction a person took independent decisions about
how many children to bring up. There are no doubts that this choice has always
Expenditures
P
R
E
S
E
N
T
No
Expenditures
A.V. Vlasov
447
influenced a set of factors, one of which is that under the absence of the pension
system a big number of children is a guarantee of the decent old age. Bringing up
the children demands of long-term costs and inevitably means lower standards of
life and material prosperity at working age. However a person knew that having
reached the age of incapacity for work, he/she could rely on either on the family
support, or on charity.
A big number of children and low level of life at present (all else being equal) meant
security in old age. The more the children the more income in the future. It is
important to mention that in this case not only a number of children will be
significant, but their “quality” as well: the ability to be the full-fledged member of
the society, the ability to work productively and possess moral qualities. Bringing up
people with these quality means society reproduction.
Figure2. Maintenance of the elderly
In fact in the places where there is no distribution pension system the formation of
the future generation, i.e. bringing up children, is a kind of investment process.
Investments are aimed at getting profits. With both expenditures and revenues are
not only monetary spendings, but non-monetary ones as well. This activity as any
investment process is risky, both profits and losses are possible. The success
depends on a number of circumstances which are to be foreseen.
There are no any moral reasons to transfer a part of the working people’s income to
other members of the society, but not their parents. However the distribution system
completely removes the connection between today’s expenses and future income.
Incomes
F
U
T
U
R
E
No
incomes
Incomes
Pension System as a Demographic Recession Factor
448
Figure 3. Distribution pension system
The distribution pension system suggests that the state pension fund interferes in the
relations among people of different generations and what is notable only at the stage
of gaining the income from the investments into the future generation.
The main principles of the distribution pension system are:
- compulsory and mandatory contributions of the working population;
- pension payments to all who have reached a certain age;
- differentiated pension payments depending on criteria established by the state:
working experience, the amount of income during the working life, etc.
The state distribution system breaks the link between a number of children, their
abilities and the income that pensioners get, because it is based on the “solidarity of
generations” principle, i.e. strict class division: the working and the pensioners.
Pension criteria and differentiation principle completely changed the incentive
system after the pension system had been introduced. The main factors influencing
the amount of pension are working experience and salary during the working life.
The longer the working life the higher the salary and the bigger the pension are. But
due to the limited resources a person has to choose among different options of
pension Expenditures
PENSION FUND
Imposed contributions Incomes
pension
pension
A.V. Vlasov
449
actions. The family is both resource and time consuming. But under the pension
system these costs do not result in a person’s good financial position after
retirement. Vice verse, those not having families spend more time on work and
career, and will have better pension. On the other hand, those spending more time on
career have better income in present in comparison with those spending a part of
time on the family. Thus, bringing up children provides any advantages neither in
present nor in the future.
Table 1. Comparison of the incentive system
Absence of the pension system Presence of the pension system
Children No children Children No children
Before old
age
Reduces
present
consumption
level
Excludes additional
expenses enabling to
maximize
consumption level or
savings
Reduces
present
consumption
level
Excludes
additional
expenses enabling
to maximize
consumption level
or savings
Agter old
age
Increases the
consumption
level in the
old age due
to the help of
family
members
Possibility to exist
only at the expenses
of savings or charity
Reduces
pension if a
person
spends a part
of time on
family rather
than on
career
Increases the
pension if a
person spends
more time on
career
incentives More incentives for families and
children
Less incentives for families and
children, More incentives for
career
The childless pensioners are at the most advantageous position, because they started
to get pensions at the expenses of the children who were brought up by other society
members. Before the pension system was introduced they had been in the worst
position. The pension system introduction allowed the people who did not
participate in the future generation formation to get income at other people's
expense, i.e. gain income without any expenses.
1. Population reproduction as an investment process whose intermediate goal is
to form human capital
Human capital is physical and intellectual abilities to work productively. In this
research each generation is considered as an available human capital and an
individual as a capital good. As any capital good an individual has a finite life and a
period of “usefulness”. Consequently brining up a new generation is a capital good
formation, investments.
Thus, it is possible to single out simple, expanded and narrowed human capital
reproduction. Economic laws and economic rationality have always influenced on
Pension System as a Demographic Recession Factor
450
people reproduction. The key issues are why the capital is reproduced and under
what conditions there is simple, expanded or narrowed capital reproduction.
The capital goods formation process is based on economic rationality. A capital
good is an intermediate stage of the human activity. A capital good itself is not
valuable for a person, because it does not satisfy the end need. It allows to produce
the end goods to satisfy such needs.
Capital formation is possible under the full protection of the property rights. The
lack of right to get income from the property always limits the capital formation.
The economic ingredient of the future generation formation process is getting
income in the old age in the form of their children’s help. While choosing this or
that investment an individual analyzes pros and cons of different alternatives. As it
was mentioned above, the imposed distribution pension system has distorted the
incentive system of the human capital formation process, which inevitably results in
the narrowed human capital reproduction.
Before the pension system was introduced a person could choose: whether to invest
into the human capital, in children, or to invest into the tangible capital in different
forms. His/her choice was based both on the expected limited income and on the
inherent risks. Market system, “invisible market hand” gave a person more rational
model of actions. The insufficiency of physical capital actually means human capital
surplus. Under such conditions the expected profit from the investments in the
physical capital will be higher than the investments into the human one. Otherwise
with the insufficiency of physical capital it is more advantageous to have family and
children. “The invisible hand” strives to remove the existing disproportions in
productivity. However the pension system introduction at least distorted the existing
order. The investment process now is directed only towards physical capital. Thus,
the pension system institution introduction has changed the institutional
environment and distorted the incentive system.
2. Pension system impact on the family institution
It is possible to contradict to the mentioned above argument because the old people
support has always been voluntarily. It has never been regulated by the state laws,
but has always been controlled by moral norms. It is not banned to have many
children who will support the old family members. That is why it is not correct to
speak about destruction of the incentive system to reproduce the human capital. Is it
possible to argue that the state pension complemented the existing system to support
the old people? This statement contradicts the main thesis of economics, i.e. limited
resources, to pay pensioners necessary resources whose only source is productive
labor of the working people, i.e. working family members. “The burden of the socalled
social achievements is on the net wage rates for employees. No matter if the
employer has the right to deduct contributions from salaries paid either in cash or
not, in favor of different social security funds. In any case the burden of these
contributions is on the workers, but on the employers” (Mises, 1996). In other
words, state pensions result in salaries reduction because the funds, which the
A.V. Vlasov
451
employers can pay as salaries and contributions to the social funds is not endless.
The contributions to the social funds reduce the funds for the salaries. Thus, the
imposed pension system resulted in relative reduction of the salaries, and
consequently, reduced the funds that remain in the family and can be invested to
reproduce the future generation.
Another important point is the impact the state pension system has on the family
institution. Any family is based on mutual collaboration. The young support the
elderly, the old ones bring up grandchildren. The pension system introduction has
liquidated this interdependence and collaboration, because the old family members
stopped being dependant on the working family members and consequently are not
motivated to take part in grandchildren’s upbringing. It is obvious that pension
system is destructing the family institution.
Discussion
Thus, the conducted research has proved that our hypothesis about that the state
distribution pension system promoted the birth rate reduction. We have proved it on
the basis of the following conclusions:
1. The distribution pension system destructs the economic incentives to reproduce
population.
2. The population reproduction is an investment process whose intermediate
objective is to form the human capital on the form of the future generation, and its
end objective is to get income in the old age. The distribution pension system
introduction reduced the value of the end objective (income in the old age), and
consequently resulted in economic inexpediency of the future generation formation
the intermediate objective of the investment process.
3. The pension system deprives the population of the resources needed to form the
future generation and promotes the family institution destruction.
Conclusion
On the basis the conducted research it is possible to conclude that the imposed state
distribution pension system is not the institution promoting the society development.
On the contrary, it has a destructive impact on the naturally formed social relations
resulting in the distortion of the demographic processes in the society.
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