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The German Retirement Benefit Formula: Drawbacks and Alternatives

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Author Info

  • Friedrich Breyer
  • Mathias Kifmann

Abstract

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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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 60 (2004)
Issue (Month): 1 (April)
Pages: 63-

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200404)60:1_63:tgrbfd_2.0.tx_2-o

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Web page: http://www.mohr.de/fa

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Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
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Related research

Keywords: pay-as-you-go pension systems; implicit taxation; notional defined contributions; intra- and intergenerational equity;

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References

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  1. 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-, September.
  2. Mathias Kifmann, 2001. "Langfristige Folgen einer Einbeziehung der Selbständigen in die gesetzliche Rentenversicherung," Discussion Papers of DIW Berlin 251, DIW Berlin, German Institute for Economic Research.
  3. Mathias Kifman & Dirk Schindler, 2000. "Smoothing the Implicit Tax Rate in a Pay-as-you-go Pension System," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(3), pages 261-, May.
  4. ûystein ThÛgersen, 1998. "A note on intergenerational risk sharing and the design of pay-as-you-go pension programs," Journal of Population Economics, Springer, vol. 11(3), pages 373-378.
  5. Marcel Thum & Jakob von Weisäcker, 2000. "Implizite Einkommensteuer als Messlatte für die aktuellen Rentenreformvorschläge," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 1(4), pages 453-468, November.
  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 Group Munich.
  7. Homburg, Stefan & Richter, Wolfram, 1990. "Eine effizienzorientierte Reform der GRV," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 183-191..
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Citations

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Cited by:
  1. Potrafke, Niklas, 2012. "Unemployment, human capital depreciation and pension benefits: an empirical evaluation of German data," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(02), pages 223-241, April.
  2. Axel Börsch-Supan & Anette Reil-Held & Christina Benita Wilke, 2003. "Der Nachhaltigkeitsfaktor und andere Formelmodifikationen zur langfristigen Stabilisierung des Beitragssatzes zur GRV," MEA discussion paper series 03030, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  3. Breyer, Friedrich & Franz, Wolfgang & Homburg, Stefan & Schnabel, Reinhold & Wille, Eberhard, 2004. "Reform der sozialen Sicherung," EconStor Books, ZBW - German National Library of Economics, number 92399.
  4. Axel Börsch-Supan & Anette Reil-Held & Christina Benita Wilke, 2003. "How to make a Defined Benefit System Sustainable: The Sustainability Factor in the German Benefit Indexation Formula," MEA discussion paper series 03037, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  5. Axel Börsch-Supan, 2007. "Rational Pension Reform," MEA discussion paper series 07132, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  6. Knell, Markus, 2010. "How automatic adjustment factors affect the internal rate of return of PAYG pension systems," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(01), pages 1-23, January.

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