Progressive Child Allowance as a Countermeasure to the Declining Number of Births

This article constructs a simple overlapping generations (OLG) model to analyze the progressive child allowance and related policies with the objective of addressing the declining number of births in Japan. The analysis assumes the existence of a pay-as-you-go pension system and a certain constraint on fiscal resources. The focus is on maximizing household utility in the steady state. Results of the analysis reveal the following findings: 1) The number of births that maximizes household utility in the steady state can be achieved by appropriately introducing a progressive child allowance. Moreover, the smaller the budget necessary to implement and support measures to address the declining number of births, the more desirable it is to increase the progressivity of the child allowance. 2) A linear child allowance can also achieve the number of births that maximizes household utility in the steady state. However, unlike the progressive child allowance, by taking the example of Japan, the specific numerical examples presented in this article demonstrate that the linear child allowance may exceed the available budget for such measures.