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Rates of Return of the German Pay-As-You-Go Pension System

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  • Schnabel, Reinhold

    ()
    (Fachb. Wirtschaftswiss., Universität-Gesamthochschule Essen)

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.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 98-56.

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Length: 28 pages
Date of creation: 02 Jul 1997
Date of revision:
Handle: RePEc:xrs:sfbmaa:98-56

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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References

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  1. Axel Borsch-Supan & Reinhold Schnabel, 1999. "Social Security and Retirement in Germany," NBER Chapters, in: Social Security and Retirement around the World, pages 135-180 National Bureau of Economic Research, Inc.
  2. 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.
  3. Friedrich Breyer & Klaus Stolte, 2000. "Demographic Change, Endogenous Labor Supply and the Political Feasibility of Pension Reform," Discussion Papers of DIW Berlin 202, DIW Berlin, German Institute for Economic Research.
  4. 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.
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Cited by:
  1. Tobias A. Jopp, 2011. "Old Times, Better Times? German Miners’ Knappschaften, Pay-as-you-go Pensions, and Implicit Rates of Return, 1854–1913," Ruhr Economic Papers 0238, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Kifmann, Mathias & Schindler, Dirk, 2000. "Demographic changes and the implicit tax rate in a pay-as-you-go pension system," Discussion Papers, Series 1 308, University of Konstanz, Department of Economics.
  3. Sinn, Hans-Werner, 1999. "The Crisis of Germany's Pension Insurance System and How It Can Be Resolved," CEPR Discussion Papers 2175, C.E.P.R. Discussion Papers.
  4. Friedrich Breyer, 2000. "Kapitaldeckungs- versus Umlageverfahren," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 1(4), pages 383-405, November.
  5. 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 Group Munich.
  6. Marcel Thum & Jakob von Weisäcker, 2000. "Implizite Einkommensteuer als Messlatte für die aktuellen Rentenreformvorschläge," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 1(4), pages 453-468, November.
  7. Axel Börsch-Supan & Simone Kohnz & Reinhold Schnabel, 2007. "The Budget Impact of Reduced Early Retirement Incentives on the German Public Pension System," NBER Chapters, in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 201-252 National Bureau of Economic Research, Inc.
  8. 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.
  9. Fehr, Hans, 1999. "Pension reform during the demographic transition," W.E.P. - Würzburg Economic Papers 8, University of Würzburg, Chair for Monetary Policy and International Economics.

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