Reducing the level of pension payments and a partially funded social insurance system - Ifo recommendations for a consolidation of the pay-as-you-go system

The plans of the German government and the parliamentary opposition for a long-term reform of the social insurance system are taking on contours, and the parliamentary hearings on a new law to reform the social insurance system should be concluded by the end of the year. However, little attention has been given to the actual foundations of a pay-as-you-go social insurance system and the distribution effects that ensue from the demographic problems of financing the system. The main cause of the crisis facing the system is the decline in the birth rate which began in the mid-1960s. This decline has lowered the average costs for children assumed by each working generation and at the same time increases the burden of the children in their later working lives. For this reasons the Ifo Institute proposes a reform concept whose main goal is a more equal distribution of the total burden from the social insurance system and the raising of children over all affected generations and also within each generation. To accomplish this a long-term stabilisation of the social insurance contribution rate and a stronger differentiation of individual social insurance benefits based on the number of children is required. A major consequences of the reform concept is the transition to a partially funded social insurance system. If the contribution rates remain stable and the number of children declines, reductions in benefits will be automatic. This can be compensated if the insured invest the money they have saved on raising children in capital markets and thus increase their retirement income.