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Should pensions be progressive? Yes, at least in Germany!

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  • Kallweit, Manuel
  • Fehr, Hans
  • Kindermann, Fabian

Abstract

Recent reforms that aim at reducing the upcoming burdens of population ageing might seriously harm low income individuals. An increase in old-age poverty and disability will be the result. Under this prospect, the present paper quantitatively characterizes the optimal progressivity of unfunded pension systems in an overlapping generations model with idiosyncratic income, disability and longe\-vi\-ty risk as well as endogenous labor supply at the intensive and extensive margin. Focusing on the German pension system, our model features the most recent demographic projections and distinguishes three skill classes with skill-dependent risk profiles. Starting from a baseline path that reflects a purely earnings related pension system, we increase the degree of progressivity and compute the resulting macroeconomic, welfare and efficiency effects. For our most preferred parametrization we find an optimal flat-rate pension share of 40 percent. This indicates that, together with the recent reforms that aim at increasing retirement age and cutting benefit levels, pension progressivity should be significantly increased in Germany, since improved insurance provision dominates higher labor supply distortions. In addition, we also find that reductions in the benefit level (i.e. privatization) will only reduce economic efficiency. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48708.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48708

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Web page: http://www.socialpolitik.org/
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Keywords: stochastic OLG model; tax-benefit linkage; endogenous retirement; population ageing;

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Cited by:
  1. Fehr, Hans & Uhde, Johannes, 2012. "Optimal Pension Design in General Equlibrium," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62024, Verein für Socialpolitik / German Economic Association.
  2. Hans Fehr & Johannes Uhde, 2013. "On the optimal design of pension systems," Empirica, Springer, vol. 40(3), pages 457-482, August.
  3. Kallweit, Manuel & Kohlmeier, Anabell, 2012. "Zusatzbeiträge in der Gesetzlichen Krankenversicherung: Weiterentwicklungsoptionen und ihre finanziellen sowie allokativen Effekte," Working Papers 06/2012, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.

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