This paper provides results from different studies conducted by the Gemma Abio, Ció Patxot (UB) and Guadalupe Souto (UAB) and other authors aiming at measuring the external effects generated by the existence of an intergenerational transfer system, such as the pension system, and the welfare state as a whole. The primary reason for the presence of this externality is that the pension system, financed on a pay-as-you-go (PAYG) basis through social contributions, socialises the intergenerational contract and thus provides insurance against not having children. This feature extends to other welfare state programs, which implicitly are also financed via PAYG. As a result, the children of some citizens, raised largely with private resources, generate a positive externality for those who do not have children. That is, the taxes paid by these children once they reach adulthood support the welfare state programs for all people, regardless of whether they had children or not.
These results are critical for the debate on pension system reform, suggesting that such reform should be considered within the broader framework of welfare state programs. That is, the set of intergenerational public transfers going forward (aimed at children) and backward (targeted at the elderly). The recent measures adopted in the Spanish pension system, focused on increasing contributions and avoiding pension adjustments, will contribute to shifting the burden of adjustment onto the generations active during the retirement of the baby boomers, further increasing the current bias of the welfare state toward the elderly. As a result, the children of the baby boomers will face the challenge of continuing to finance the entitlements acquired by their parents within the pay-as-you-go pension system, while also maintaining fertility and the costs of policies aimed at children (education and family policies), which are key to ensuring equity and also paying for future pension transfers.
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