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Should Pensions be Progressive? Yes, at least in Germany!

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  • Hans Fehr
  • Manuel Kallweit
  • Fabian Kindermann

Abstract

Recent reforms that aim at reducing the upcoming burdens of population ageing might seriously harm low income individuals. An increase in old-age poverty and disability will be the result. Under this prospect, the present paper quantitatively characterizes the optimal progressivity of unfunded pension systems in an overlapping generations model with idiosyncratic income, disability and longevity risk as well as endogenous labor supply at the intensive and extensive margin. Focusing on the German pension system, our model features the most recent demographic projections and distinguishes three skill classes with skill-dependent risk profiles. Starting from a baseline path that reflects a purely earnings related pension system, we increase the degree of progressivity and compute the resulting macroeconomic, welfare and efficiency effects. For our most preferred parametrization we find an optimal flat-rate pension share of 40 percent. This indicates that in Germany recent reforms that aim at raising retirement age and cutting benefit levels should be complemented by increases in pension progressivity, since improved insurance provision dominates higher labor supply distortions. In addition, we also find that reductions in the benefit level (i.e. privatization) will only reduce economic efficiency.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3636.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3636

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Keywords: stochastic OLG model; tax-benefit linkage; endogenous retirement; population ageing;

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References

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  1. Sebnem Kalemli-Ozcan & David Weil, 2006. "Mortality Change, the Uncertainty Effect, and Retirement," 2006 Meeting Papers 28, Society for Economic Dynamics.
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  3. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
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  6. Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," Working Papers wp106, University of Michigan, Michigan Retirement Research Center.
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Citations

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Cited by:
  1. Kallweit, Manuel & Kohlmeier, Anabell, 2012. "Zusatzbeiträge in der Gesetzlichen Krankenversicherung: Weiterentwicklungsoptionen und ihre finanziellen sowie allokativen Effekte," Working Papers 06/2012, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
  2. Hans Fehr & Franz Ruland & Gisela Färber & Annelie Buntenbach, 2012. "Beitragssenkung und Zuschussrente: Ist das eine nachhaltige Rentenpolitik?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(19), pages 04-16, October.
  3. Fehr, Hans & Uhde, Johannes, 2012. "Optimal Pension Design in General Equlibrium," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62024, Verein für Socialpolitik / German Economic Association.
  4. Hans Fehr & Johannes Uhde, 2013. "On the optimal design of pension systems," Empirica, Springer, vol. 40(3), pages 457-482, August.

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