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Rates of return of the German pay-as-you-go pension system

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  • Schnabel, Reinhold

Abstract

Due to population aging, contribution rates of the mandatory German pay-as-you-go pension system are expected to increase dramatically during the next decades. This paper estimates the impact on the expected returns of contributions for different cohorts. I show that rates of return for younger cohorts will be between zero and one percent, depending on the demographic and economic scenarios; for some demographic groups they become negative. The implicit tax rates reach levels of around two-thirds of contributions for the youngest cohorts. If decreasing returns reduce incentives for labor supply and system participation, the whole system may become unsustainable. Indeed, I find empirical evidence for a recent decline of voluntary contributions and for a substitution away from taxable employment.

Suggested Citation

  • Schnabel, Reinhold, 1998. "Rates of return of the German pay-as-you-go pension system," Papers 98-56, Sonderforschungsbreich 504.
    • Handle: RePEc:mnh:spaper:2863
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    1. Schnabel, Reinhold, 1997. "Intergenerational Distribution and Pension Reform in Germany," Working Papers 14962, University of Mannheim, Department of Economics.
    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. Schnabel, Reinhold, 1998. "The Declining Participation in the German PAYG-Pension System," Sonderforschungsbereich 504 Publications 99-42, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    4. Fitzenberger, Bernd & Hujer, Reinhard & MaCurdy, Thomas E. & Schnabel, Reinhold, 1995. "The dynamic structure of wages in Germany 1976 - 1984: A cohort analysis," Discussion Papers 22, University of Konstanz, Center for International Labor Economics (CILE).
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