The pay-as-you-go pension system as fertility insurance and an enforcement device

A PAYGO system may serve as insurance against not having children
and as an enforcement device for ungrateful children who are
unwilling to pay their parents a pension. In fact, the latter was
Bismarck’s historic motive for introducing this system. It is true
that the PAYGO system reduces the investment in human capital, but
if it is run on a sufficiently small scale, it may nevertheless
bring about a welfare improvement. If, on the other hand, the scale
of the system is so large that parents bequeath some of their
pensions to their children, it is overdrawn and creates
unnecessarily strong disincentives for human capital investment.