Impact of the Number of Children in the Family on Old-age Pensions

There are two ways people can contribute to pension system – through social tax paid on wage and/or having children, who will grow up to be next tax payers. Most European countries use systems, where the right to old-age pension and the size of it are determined by the number of years people have worked before retirement, their earnings or the contributions to pension system made on their earnings. However, some countries, for example Greece and Slovakia to name a few, also take the number of children and the time spent on caring for them into account.

Estonian system

In Estonia, state old-age pension is mostly dependant on the number of years a person has worked and the amount of social tax paid for that person. The number of children affects pensions in two aspects. In families with three or more children, one of the parents can retire before the pensionable age. This, to some degree, compensates the time spent away from labour market due to raising children. Still, the size of the contributions paid into pension funds while caring for the children are quite small, meaning people with no children will have higher old-age pensions.

Suggestions

In a situation like this, alternatives to current system that would tie the old-age pension to the number of children are worth considering. Having adapted different authors’ policy alternatives to suit Estonian pension system, the study proposes a combined approach where sanctions are tied to superannuations and stimuli to pension payouts. To make sure they have enough income at old age, people should invest either to human capital by raising children or real capital by paying bigger superannuations.