Mixing Bismarck and child pension systems: an optimum taxation approach

Pensions with a strong tax–benefit link (Bismarck pensions) minimise the labour–leisure distortion of the public pension system. By contrast, pensions with a strong link of benefits to the number of children (child pensions) minimise the fertility distortion. When both types of distortion are present, we obtain a Corlett–Hague result regarding the optimal mix of the two pension formulae: the Bismack pension should be given a positive weight if and only if children are more complementary to leisure than consumption. Alternative fertility instruments such as child benefits turn out to be perfect substitutes to a child pension.