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A Blue Print For Germany’s Pension Reform

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  • Axel Börsch-Supan

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    (Munich Center for the Economics of Aging (MEA))

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    Abstract

    Germany relies almost exclusively on a public pay-as-you-go pension system for old-age in-come provision. This mandatory “retirement insurance” has become under severe pressure, mainly from population aging and from incentive effects that have reduced labor supply. This paper argues Germany needs a pension reform with three main elements: (1) A reformed pay-as-you-go pillar which is actuarially fair, features a transparent notional account set-up, and freezes contribution rates at the current level; (2) A second funded pillar which is based on US 401(k)-style grouped accounts that finance the impending aging burden; (3) Augmented by redistributive features that guarantee a minimum pension and strengthen human capital formation. The paper briefly discusses the sources of the current problems, details the reform proposal, in particular the cohort- and time-varying transition burden which turns out to be rather moderate, and sheds light on the side effects of such a transition on the German macro economy which are more subtle than is often claimed.

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    Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 02002.

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    Date of creation: 10 Jan 2002
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    Handle: RePEc:mea:meawpa:02002

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    References

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    1. Axel Borsch-Supan, 1998. "Incentive Effects of Social Security on Labor Force Participation: Evidence in Germany and Across Europe," NBER Working Papers 6780, National Bureau of Economic Research, Inc.
    2. Borsch-Supan, Axel & Schnabel, Reinhold, 1998. "Social Security and Declining Labor-Force Participation in Germany," American Economic Review, American Economic Association, vol. 88(2), pages 173-78, May.
    3. Sikandar Siddiqui, 1997. "The pension incentive to retire: Empirical evidence for West Germany," Journal of Population Economics, Springer, vol. 10(4), pages 463-486.
    4. Corsetti, Giancarlo & Schmidt-Hebbel, Klaus, 1995. "Pension reform and growth," Policy Research Working Paper Series 1471, The World Bank.
    5. PESTIEAU, Pierre & POSSEN, Uri M., . "Investing social security in the equity market. Does it make a difference?," CORE Discussion Papers RP -1444, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Walliser, Jan & Winter, Joachim, 1998. "Tax incentives, bequest motives and the demand for life insurance: evidence from Germany," Sonderforschungsbereich 504 Publications 99-28, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    7. Martin Feldstein, 1998. "Privatizing Social Security," NBER Books, National Bureau of Economic Research, Inc, number feld98-1.
    8. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
    9. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-88, September.
    10. Brunner, Johann K., 1993. "Redistribution and the efficiency of the pay-as-you-go pension system," Discussion Papers, Series 1 265, University of Konstanz, Department of Economics.
    11. Robert Holzmann, 1996. "Pension Reform, Financial Market Development, and Economic Growth," IMF Working Papers 96/94, International Monetary Fund.
    12. Börsch-Supan, Axel, 1998. "Incentive Effects of Social Security on Labor Force Participation: Evidence in Germany and Across Europe," Sonderforschungsbereich 504 Publications 98-29, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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