Optimal Social Security in a Sandwich-Generation Economy: Family Support, Fertility, and Human Capital
By Ernie Chuang & Wei-Yi Gan
This paper develops an overlapping-generations model of a sandwich generation in which middle-aged households allocate scarce time and resources across market work, fertility, child quality, and support for elderly parents. The central distortion is that households overallocate time to elderly support due to strategic bequest motives. Households underinvest in child quantity and quality because distortionary payroll taxation makes caregiving time privately cheaper than its full social cost. Since human capital depends on both educational expenditure and parental time, optimal policy taxes intergenerational caregiving, provides a lower subsidy for childrearing time than for educational expenditure, and divides old-age social security between pension benefits and work-contingent labor subsidies. A calibrated illustration shows a welfare loss of about 7.8 percent relative to the efficient allocation, while the optimal fiscal response places greater weight on childrearing-time subsidies than on expanding pension transfers. More broadly, the analysis links population aging and low fertility through competition for scarce household time within families.
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