Rates of Return of the German Pay-As-You-Go Pension System
AbstractDue 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.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 98-56.
Length: 28 pages
Date of creation: 02 Jul 1997
Date of revision:
Note: I wish to thank Axel Börsch-Supan, Hans Fehr, Isabel Gödde, Joachim Winter and seminar participants at the Universities of Mannheim and Frankfurt/Main for helpful comments on earlier versions of this paper. Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-03-15 (All new papers)
- NEP-POL-1999-03-15 (Positive Political Economics)
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