The Declining Participation in the German PAYG-Pension System

With rising contributions and decreasing returns of the German Pay-As-You-Go pension system the economic incentives to participate in the system are diminishing. Fairly little is known about the behavioral reactions of persons who are making contributions. This is ¹ at least in part ¹ due to the fact that behavioral reactions are not directly observable to the extend that participation is mandatory. Thus, I use indirect evidence. First, on the aggregate level, I show that there is a substitution away from social security employment. Second, on the micro level, I consider voluntary contributions. Using administrative data from the social security records, I can show that voluntary system participation and contributions have been decreasing over the last 15 years. Third, I consider the self-employed, which usually can decide to contribute voluntarily to the PAYG pension system. Using data from the German Socio-economic Panel, I can find clear evidence that self-employed have reacted to changes in the incentive structure induced by important institutional changes. Moreover, even after controlling for the specific incentive structure for self-employed, contributions have fallen over time.