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A Note on the Tax Rate implicit in Contributions to Pay-as-you-go Public Pension Systems

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  • Klaus Beckmann

Abstract

This is a paper about the (wage) tax implicit in contributions to pay-as-you- go pension systems. I begin by addressing the implicit life-cycle tax rate. It is shown that a popular rule of thumb for "back of the envelope" computations of the proportion of pension contributions constituting a tax is flawed. In a highly stylised model, however, simple algebra suffices to compute implicit tax rates, and the results tally well with existing estimates. I then turn to the implicit tax on current wages created by paygo pension systems. Intuition, formal analysis and numerical examples are provided to show that this tax rate is likely to fall through-out a contributor's working life, and that it may in fact become negative. I explain asymmetries between the growth of per capita wages and population growth, which combine to constitute the aggregate rate of return on paygo contributions.

Suggested Citation

  • Klaus Beckmann, 2000. "A Note on the Tax Rate implicit in Contributions to Pay-as-you-go Public Pension Systems," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(1), pages 63-76, September.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200009)57:1_63:anottr_2.0.tx_2-5
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    References listed on IDEAS

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    1. Sinn, Hans-Werner, 1997. "The Value of Children and Immigrants in a Pay-As-You-Go Pension System: A Proposal For a Partial Transition to a Funded System," CEPR Discussion Papers 1734, C.E.P.R. Discussion Papers.
    2. repec:mhr:btrfin:urn:isbn:9783161629983 is not listed on IDEAS
    3. Murphy, Kevin M & Welch, Finis, 1998. "Perspectives on the Social Security Crisis and Proposed Solutions," American Economic Review, American Economic Association, vol. 88(2), pages 142-150, May.
    4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
    5. Homburg, Stefan & Richter, Wolfram, 1990. "Eine effizienzorientierte Reform der GRV," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 183-191.
    6. Werding, Martin, 1998. "Zur Rekonstruktion des Generationenvertrages," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 3, number urn:isbn:9783161468896, December.
    7. Schnabel, Reinhold, 1998. "Rates of return of the German pay-as-you-go pension system," Papers 98-56, Sonderforschungsbreich 504.
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    Cited by:

    1. Gasche, Martin & Rausch, Johannes, 2012. "Auswirkungen einer Versicherungspflicht der Selbständigen in der Gesetzlichen Rentenversicherung," MEA discussion paper series 201212, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    2. repec:mea:meawpa:12263 is not listed on IDEAS
    3. Hans-Werner Sinn, 2000. "Why a Funded Pension System is Needed and Why It is Not Needed," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(4), pages 389-410, August.
    4. Breyer Friedrich, 2001. "Zur Rentenproblematik: Lösungswege und Reformvorschläge. Hinterbliebenensicherung und Ehegattensplitting in der Sozialversicherung," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 50(2), pages 169-178, August.
    5. Mathias Kifmann, 2008. "Age‐Dependent Taxation and the Optimal Retirement Benefit Formula," German Economic Review, Verein für Socialpolitik, vol. 9(1), pages 41-64, February.
    6. Robert Fenge & Silke Uebelmesser & Martin Werding, 2002. "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence," CESifo Working Paper Series 743, CESifo.
    7. Breyer, Friedrich & Franz, Wolfgang & Homburg, Stefan & Schnabel, Reinhold & Wille, Eberhard, 2004. "Reform der sozialen Sicherung: Kurzfassung," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92399.
    8. Metzger, Christoph, 2016. "The German statutory pension scheme: Balance sheet, cross-sectional internal rates of return and implicit tax rates," FZG Discussion Papers 63, University of Freiburg, Research Center for Generational Contracts (FZG).
    9. Robert Fenge & Martin Werding, 2003. "Ageing and Fiscal Imbalances Across Generations: Concepts of Measurement," CESifo Working Paper Series 842, CESifo.
    10. Mathias Kifmann, 2008. "Age-Dependent Taxation and the Optimal Retirement Benefit Formula," German Economic Review, Verein für Socialpolitik, vol. 9, pages 41-64, February.
    11. Gustafsson, Johan, 2021. "Public Pension Reform and the Equity-Efficiency Trade-off," Umeå Economic Studies 992, Umeå University, Department of Economics.
    12. Friedrich Breyer & Mathias Kifmann, 2004. "The German Retirement Benefit Formula: Drawbacks and Alternatives," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(1), pages 63-82, April.
    13. Sinn, Hans-Werner, 2000. "Why a Funded Pension System is Useful and Why It is Not Useful," Munich Reprints in Economics 19859, University of Munich, Department of Economics.

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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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