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On the Fairness of Early-Retirement Provisions

Author

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  • Breyer Friedrich

    (University of Konstanz, Universitätsstraße 10,Konstanz, Germany)

  • Hupfeld Stefan

    (University of Konstanz, Universitätsstraße 10,Konstanz, Germany)

Abstract

A crucial parameter for increasing the retirement age is the early retirement discount of the public pension system. Critics of the present German system argue that the downward adjustment of the pension for early retirees is too small compared with a ‘fair’ system and thus encourages early retirement. We discuss several notions of ‘fairness’ of early-retirement provisions and propose a concept called ‘distributive neutrality’, which states that the ratio between total benefits and total contributions should not depend systematically on the individual’s ability. By applying this concept to the German retirement benefit formula and taking empirically estimated relationships between annual income (as a proxy for ability), life expectancy and retirement age into account, we show that at the present discount rate of 3.6% per year there is redistribution from low to high earners, which, surprisingly, could be attenuated by raising the discount rate.

Suggested Citation

  • Breyer Friedrich & Hupfeld Stefan, 2010. "On the Fairness of Early-Retirement Provisions," German Economic Review, De Gruyter, vol. 11(1), pages 60-77, February.
    • Handle: RePEc:bpj:germec:v:11:y:2010:i:1:p:60-77
    DOI: 10.1111/j.1468-0475.2009.00464.x
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    Cited by:

    1. Sanchez-Romero, Miguel & Lee, Ronald D. & Prskawetz, Alexia, 2020. "Redistributive effects of different pension systems when longevity varies by socioeconomic status," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    2. Walter Fisher & Christian Keuschnigg, 2010. "Pension reform and labor market incentives," Journal of Population Economics, Springer;European Society for Population Economics, vol. 23(2), pages 769-803, March.
    3. Hupfeld, Stefan, 2009. "Rich and healthy--better than poor and sick?: An empirical analysis of income, health, and the duration of the pension benefit spell," Journal of Health Economics, Elsevier, vol. 28(2), pages 427-443, March.
    4. Kindermann, Fabian & Pueschel, Veronika, 2021. "Progressive Pensions as an Incentive for Labor Force Participation," CEPR Discussion Papers 16380, C.E.P.R. Discussion Papers.
    5. Sanchez-Romero, Miguel & Lee, Ron & Fürnkranz-Prskawetz, Alexia, 2019. "Redistributive effects of different pension structures when longevity varies by socioeconomic status in a general equilibrium setting," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203628, Verein für Socialpolitik / German Economic Association.
    6. Ludwig, Alexander, 2016. "Das Deutsche Rentensystem: Thesen zur derzeitigen Diskussion um "Umkehr"-Reformen," SAFE White Paper Series 40, Leibniz Institute for Financial Research SAFE.
    7. Johann K. Brunner & Bernd Hoffmann, 2010. "Versicherungsmathematisch korrekte Pensionsabschläge," Economics working papers 2010-13, Department of Economics, Johannes Kepler University Linz, Austria.
    8. Tim Krieger & Christine Meemann & Stefan Traub, 2022. "Inequality, Life Expectancy, and the Intragenerational Redistribution Puzzle - Some Experimental Evidence," CESifo Working Paper Series 9677, CESifo.
    9. Kemptner, Daniel & Haan, Peter & Lüthen, Holger, 2017. "The increasing longevity gap by lifetime earnings and its distributional implications," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168278, Verein für Socialpolitik / German Economic Association.
    10. Zhen Hu & James Yang, 2021. "Does Delayed Retirement Crowd Out Workforce Welfare? Evidence in China," SAGE Open, , vol. 11(4), pages 21582440211, November.
    11. Hans FEHR, 2010. "Pension Reform with Variable Retirment Age," EcoMod2010 259600055, EcoMod.
    12. Adi Brender, 2009. "Distributive Effects of Israel's Pension System," Bank of Israel Working Papers 2009.10, Bank of Israel.
    13. Hugo Benitez-Silva & Na Yin, 2007. "An Empirical Study of the Effects of Social Security Reforms on Claming Behavior and Benefits Receipt Using Aggregate and Public-Use Administrative Micro Data," Department of Economics Working Papers 07-05, Stony Brook University, Department of Economics.
    14. Friedrich Breyer & Stefan Hupfeld, 2009. "Fairness of Public Pensions and Old-Age Poverty," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(3), pages 358-380, September.
    15. Potrafke, Niklas, 2012. "Unemployment, human capital depreciation and pension benefits: an empirical evaluation of German data," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(2), pages 223-241, April.
    16. Martin Werding, 2007. "Versicherungsmathematisch korrekte Rentenabschläge für die gesetzliche Rentenversicherung," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(16), pages 19-32, August.
    17. Arno Baurin, 2020. "The Limited Power of Socioeconomic Status to Predict Longevity: Implications for Pension Policy," LIDAM Discussion Papers IRES 2020019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    18. Jin Hu & Peter-Josef Stauvermann & Surya Nepal & Yuanhua Zhou, 2023. "Can the Policy of Increasing Retirement Age Raise Pension Revenue in China—A Case Study of Anhui Province," IJERPH, MDPI, vol. 20(2), pages 1-15, January.
    19. Fisher, Walter H. & Keuschnigg, Christian, 2011. "Life-Cycle Unemployment, Retirement, and Parametric Pension Reform," Economics Series 267, Institute for Advanced Studies.
    20. Stefan Arent & Alexander Eck & Oskar Krohmer & Robert Lehmann & Wolfgang Nagl & Joachim Ragnitz & Marcel Thum, 2011. "Wirtschaftliche Entwicklung Sachsens im Ländervergleich: Bestandsaufnahme und Perspektiven: Gutachten im Auftrag der Sächsischen Staatskanzlei," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 59, February.
    21. Zaigui Yang & Xiaohua Chen, 2024. "Actuarial Evaluation of the Financial Backing Risk on Chinese Public Pension," SAGE Open, , vol. 14(3), pages 21582440241, September.
    22. Lüthen Holger, 2016. "Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform," German Economic Review, De Gruyter, vol. 17(2), pages 206-233, May.
    23. Pu Liao & Hui Su & Dragan Pamučar, 2020. "Will Ending the One-Child Policy and Raising the Retirement Age Enhance the Sustainability of China’s Basic Pension System?," Sustainability, MDPI, vol. 12(19), pages 1-20, October.
    24. Jin Hu & Peter Josef Stauvermann & Juncheng Sun, 2022. "The Impact of the Two-Child Policy on the Pension Shortfall in China: A Case Study of Anhui Province," Sustainability, MDPI, vol. 14(13), pages 1-21, July.

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    Keywords

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    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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