We identify several objectionable features of the German retirement benefit formula. Groups of insureds with higher than average life expectancy are subsidized by the rest of the members because the formula neglects differences in group-specific life expectancy. Moreover, undesirable long-run effects arise if the earnings ceiling is raised or mandatory membership is extended, or if life expectancy rises or the rate of population growth declines. We present three alternative formulas. In particular, a return-rate formula that rewards contributions with the internal rate of return of the pay-as-yougo pension system is superior to the current formula. This formula corresponds to the concept of notional defined contribution pensions that has been recently introduced in several countries.
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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.
Find related papers by JEL classification: H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
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