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only can mean, that the pension claim is not earnings-(income-) related but only flat rate. This
would change the present concept of the German pension insurance scheme fundamentally.
There is now a debate going on, how to react to the demand of the Constitutional Court. It
will be important to analyse the arguments of the Court as well as the effects of instruments
that can be used to improve the financial situation of families during the period of raising
children.
The argument that raising children is a contribution to PAYGO financed schemes and should
be rewarded within the pension scheme was already put forward in the past and sounds very
plausible for the moment. Since many years, proposals have been existing to make the
contribution payments depending on the number of children.11 This can be done in principle
by different contribution rates but also by implementing a flat rate allowance (depending on
the number of children) into the formula for calculating the contribution payment. On the
other hand, there exist proposals to differentiate the pension benefit according to the number
of children, for example giving the full pension benefit only to those insured persons that have
raised 2 children (more or less the number of children necessary for realising a constant
number of births).
The main argument behind these proposals as well as the decision of the Constitutional Court
is that raising children has positive externalities for other persons. In particular, the children
will be potential future contributors to social insurance. The external effect of this has to be
internalised by improving the income position of families.
Before discussing different instruments for internalising externalities, some more general
questions will be mentioned that have to be answered when deciding on the ways and means
to improve the conditions for families raising children.
Regarding externalities, for example regarding future financing of social insurance, not only
the number of children is decisive but above all the human capital of children and the future
productivity of children during their working life. But how can the externalities of raising
children be quantified? This - following the argument of those who base their proposals on
externalities - has to be done in all areas, that means in the different social insurance
schemes as well as for the whole society in general. Following this line of argument, it is not
adequate to limit the improvement of living conditions of families only to those families who
are contributing to a PAYGO scheme. For example, if parents are members of a mandatory
funded scheme - as in Germany for professional associations like lawyers, doctors, architects
and some other groups of self-employed - then their children will to a high percentage
become members of a PAYGO scheme in the future, while on the other hand parents being
11 See Schmahl (1988) for a discussion on this and for further references. Horstmann (1996) gives an
overview of different proposals how to compensate families within social pension insurance in
case of raising children.