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How to make a Defined Benefit System Sustainable: The Sustainability Factor in the German Benefit Indexation Formula

Author

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  • Börsch-Supan, Axel
  • Reil-Held, Anette
  • Christina Benita Wilke

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

Abstract

Two years after the "Riester reform" the German public pension system is once again in need of reform. The demographic and labor market assumptions underpinning the Riester reform have proved to be unrealistic. An important target of current reform attempts is the formula that annually re-adjusts the benefits for all pensioners, the benefit indexation formula. Modifications of this formula can considerably ease the financial pressure of pensions on labor since this formula impacts existing pensioners as well as new retirees. This paper presents and examines the implications of possible alternatives to the current benefit indexation formula. In particular, we examine the self-stabilizing effect of the "sustainability factor" which aims at achieving more long-run stability and intergenerational equity in the pension system by linking annual benefit changes to the so-called system dependency ratio, the ratio of beneficiaries to contributors.

Suggested Citation

  • Börsch-Supan, Axel & Reil-Held, Anette & 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.
    • Handle: RePEc:mea:meawpa:03037
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    References listed on IDEAS

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    1. Börsch-Supan, Axel & Tito Boeri & Guido Tabellini, 2002. "Would you Like to Reform the Pension System?," MEA discussion paper series 02007, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    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 173-178, May.
    3. Christoph Borgmann & Matthias Heidler, 2003. "Demographics and Volatile Social Security Wealth: Political Risks of Benefit Rule Changes in Germany," CESifo Working Paper Series 1021, CESifo.
    4. Borsch-Supan, Axel, 2000. "A Model under Siege: A Case Study of the German Retirement Insurance System," Economic Journal, Royal Economic Society, vol. 110(461), pages 24-45, February.
    5. 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.
    6. Berkel, Barbara & Börsch-Supan, Axel, 2003. "Renteneintrittsentscheidungen in Deutschland: Langfristige Auswirkungen verschiedener Reformoptionen," MEA discussion paper series 03031, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    7. Boeri, Tito & Börsch-Supan, Axel & Tabellini, Guido, 2002. "Would you Like to Reform the Pension System? The Opinions of European Citizens," Sonderforschungsbereich 504 Publications 02-22, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    Cited by:

    1. Börsch-Supan, Axel, 2004. "From Public Pension to Private Savings: The Current Pension Reform Process in Europe," MEA discussion paper series 04050, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    2. Oriol Roch & Manuela Bosch- Príncep & Isabel Morillo & Daniel Vilalta, 2015. "A revision of the revaluation index of Spanish pensions," UB School of Economics Working Papers 2015/322, University of Barcelona School of Economics.
    3. Markus Knell, 2005. "On the Design of Sustainable and Fair PAYG Pension Systems When Cohort Sizes Change," Working Papers 95, Oesterreichische Nationalbank (Austrian Central Bank).
    4. Akin Serife Nuray, 2012. "Immigration, Fiscal Policy, and Welfare in an Aging Population," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-45, July.
    5. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 16-27, February.
    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(1), pages 1-23, January.
    7. Christian Hertrich, 2013. "Asset Allocation Considerations for Pension Insurance Funds," Springer Books, Springer, edition 127, number 978-3-658-02167-2, January.

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