Beiträge zur Finanzwissenschaft herausgegeben von Hans-Werner Sinn und Clemens Fuest 31 Beatrice Scheubel Bismarck’s Institutions A Historical Perspective on the Social Security Hypothesis Mohr Siebeck Beatrice Scheubel, born 1984; studied economics in Munich and Warwick (UK); 2012 PhD in public economics; currently employed at the European Central Bank. e-ISBN PDF 978-3-16-152497-4 ISBN 978-3-16-152272-7 ISSN 0340-675X (Beiträge zur Finanzwissenschaft) Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbiblio- graphie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. © 2013 by Mohr Siebeck Tübingen. www.mohr.de This book may not be reproduced, in whole or in part, in any form (beyond that permitted by copyright law) without the publisher’s written permission. This applies particularly to reproductions, translations, microfilms and storage and processing in electronic systems. The book was printed on non-aging paper and bound by Gulde-Druck in Tübingen. Printed in Germany. To my parents Preface Why would an economist write a scientific book on fertility? Because it matters. It matters for all those topics we face every day in modern societies: it matters for the ageing problem that will significantly weigh on growth in most developed economies during the coming years; it matters for the size of future pension increases and it matters for whether people will have to work longer. While it is necessary to identify not only the problem of declining fertility, but also its causes, there is surprisingly little evidence on one of its major causes of declining fertility: the existence of public institutions. To activate and to contribute to this debate, I decided to write this book. However, identifying an effect of social security on fertility is not easy, since social security systems have been in place in many countries for decades. Therefore, I pursued the project with historical data. The first comprehensive social security system in the world was introduced in Germany, which coinci- dentally also has quite reliable historical statistics. Notwithstanding this, his- torical statistics do not exist for every single issue the researcher would like to analyse. When I tried to gather this data, many colleagues were sceptical whether I would find the data for a proper empirical analysis. It became clear that I could finish this project only when Kathrin Weny made me aware of the work by Monika Sniegs and Lars Kaschke who had collected data from the public pension insurance administration in Imperial Germany. Matched with demographic information from the Annual Yearbooks of Statistics they are a valuable source for understanding the introduction of social insurance in Imperial Germany. Working with historical data also led me to come across some interesting historical particularities: Bavaria was special: Bavaria’s special role in the federation of German states was mirrored in how much Bavarian Regional Insurance Agencies had to adhere to instructions from the Federal Insurance Agency. The pension system was a dowry fund: Even though women were covered by pension insurance if they worked in a profession that qualified for pension insurance, they remained effectively uninsured since they would claim back their contributions as soon as they got married. Discrimination of Slav minorities in east Prussia even happened within the pension system: Lars Kaschke and Monika Sniegs already mentioned the discrimination of Slav minorities as an explanation for unusual data patterns in their work on the quality of the statistics collected VIII by pension insurance administration in Imperial Germany. I show that this effect is robust to controlling for a series of confounding factors, and have devoted one appendix in this book to provide econometric evidence. Bismarck’s pension system was not ’Bismarckian’: the original 1889 law on pension insurance has many funded elements. Thus, Bismarck’s pension system as it was introduced initially was not ’Bismarckian’ in the sense in which it is nowadays referred to by economists. Largely unnoticed by today’s scientific community (and even less so by the contemporary one), the early years of the pension system witnessed a regime change. While dealing with these and many other questions (and answers) that I pro- vide in this book, many people have supported me in pursuing this project: First and foremost I am grateful to my family for their continuous support. Second, I am grateful to my ‘academic teachers’ from whom I have learned how to work scientifically. Hans-Werner Sinn’s fervour with which he pub- licly addresses economic issues and public policy problems has inspired me to write about such a political topic. My supervisor’s ever critical approach made me think twice about my arguments and identification strategies. And of course, without him I would not have discovered my enthusiasm for pub- lic economics during my undergraduate studies. Without Joachim Winter, I would not have started to work empirically. Daniel Schunk taught me how to write and review papers properly. Third, I am grateful to Amelie Wuppermann for her comments on texts and methods and to both Amelie and Nikolaus Solonar for reading this manuscript, despite its length, more than once. I thank Laila Neuthor for her support and advice. Fourth, I am also grateful to the colleagues at the Center for Economic Stud- ies who provided support and comments in various internal seminars and to Mailina Lienke, Kathrin Weny, Jakob Eberl and Daniele Montanari who pro- vided valuable research assistance at the Center for Economic Studies. Last but not least, I would like to thank my editor Stephanie Warnke-De Nobili for her support and suggestions which have helped me to turn the book into its current ’edited’ version. Working on this book reminded me time and again that we can only learn the real lessons for the future from the past. I hope that this work will raise the awareness for the impact that public policies can have on people’s be- haviour, even if such effects may take a long time to become visible. Frankfurt am Main, May 2013 Beatrice Scheubel Contents Contents .................................. IX List of Figures ............................... XIII List of Tables ............................... XV Chapter 1: Fertility and the Family .................... 1 1.1 The Fertility Decline . ....................... 2 1.2 The Demographic Transition .................... 6 1.2.1 Cultural Change ....................... 10 1.2.2 The Theory of Prosperity .................. 18 1.2.3 The Role of the State .................... 20 Chapter 2: The Fertility Decline in Germany .............. 23 2.1 Theory and Evidence . ....................... 24 2.1.1 Microeconomic Foundations of Fertility Theory . ..... 24 2.1.2 Testing Fertility Theory . .................. 24 2.2 Measuring Fertility . ........................ 25 2.2.1 Fertility Indices and Natural Fertility ............ 26 2.2.2 Data . ............................. 29 2.2.3 Comparison of Fertility Measures . ............. 29 2.3 Mapping the Fertility Decline in Germany ............ 30 2.3.1 Timing ............................ 32 2.3.2 Causes of the Fertility Decline ............... 32 2.3.3 Industrialisation . ....................... 34 2.3.4 Direct Effects on Fertility .................. 43 2.3.5 Indirect Effects on Fertility . ................ 57 Chapter 3: Bismarck’s Pension System .................. 77 3.1 The Introduction of Social Insurance ............... 77 3.2 Pension System Classification . .................. 84 3.2.1 Fully Funded versus Pay As You Go ............ 85 3.2.2 Bismarckian versus Beveridgean . ............. 93 3.2.3 Defined Benefit versus Defined Contribution . ....... 95 3.3 The Impact of Pension Insurance . ................ 96 X Contents 3.4 Regional Insurance Agencies .................... 99 3.5 Details on Pensions ......................... 103 Chapter 4: From Social Security to Fertility ............... 105 4.1 The Social Security Hypothesis . ................. 105 4.2 Pensions and Fertility in a Simple Model . ............ 107 4.3 Model Implications ......................... 110 4.3.1 Fully Funded System . .................... 112 4.3.2 Pay As You Go System . ................. 113 4.3.3 The Timing Effect ...................... 116 4.3.4 Labour Market Effects .................... 118 4.3.5 The Moral Hazard Effect . ................. 120 4.4 Implications . ............................ 121 Chapter 5: Pensions and Fertility ..................... 123 5.1 Identification and Econometric Model . .............. 124 5.1.1 The Introduction of Social Security . ............ 125 5.1.2 Measuring the Effect of the Pension System . ....... 127 5.1.3 Difference-in-Differences Approach . ............ 133 5.1.4 Multivariate Model ...................... 137 5.2 Descriptive Evidence . ....................... 140 5.2.1 Insurance Coverage and Fertility .............. 140 5.2.2 Regional Differences . .................... 144 5.2.3 Anticipation Effects . .................... 149 5.3 Multivariate Results . ....................... 149 5.3.1 Difference-in-Differences Model .............. 149 5.3.2 Multivariate Model ...................... 155 5.3.3 Income and Substitution Effect . .............. 159 5.3.4 The Dowry Effect ...................... 166 5.3.5 Considerations on the Fiscal Externality . ......... 175 5.4 Sensitivity Analyses . ....................... 178 5.4.1 Measuring Pension Insurance Coverage? . ......... 178 5.4.2 Social Insurance or Pension