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Should Pensions be Progressive? Yes, at least in Germany!

Author

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  • Hans Fehr
  • Manuel Kallweit
  • Fabian Kindermann

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 longevity 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 in Germany recent reforms that aim at raising retirement age and cutting benefit levels should be complemented by increases in pension progressivity, 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.

Suggested Citation

  • Hans Fehr & Manuel Kallweit & Fabian Kindermann, 2011. "Should Pensions be Progressive? Yes, at least in Germany!," CESifo Working Paper Series 3636, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3636
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    References listed on IDEAS

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    Citations

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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. Felix Hüfner & Caroline Klein, 2012. "The German Labour Market: Preparing for the Future," OECD Economics Department Working Papers 983, OECD Publishing.
    3. Hans Fehr & Johannes Uhde, 2013. "On the optimal design of pension systems," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(3), pages 457-482, August.
    4. Hans Fehr & Franz Ruland & Gisela Färber & Annelie Buntenbach, 2012. "Beitragssenkung und Zuschussrente: Ist das eine nachhaltige Rentenpolitik?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65(19), pages 04-16, October.
    5. Kallweit Manuel & Kohlmeier Anabell, 2014. "Zusatzbeiträge in der Gesetzlichen Krankenversicherung / Income-independent Surcharges in German Statutory Health Insurance: Weiterentwicklungsoptionen und ihre finanziellen sowie allokativen Effekte ," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 234(4), pages 490-517, August.
    6. 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.

    More about this item

    Keywords

    stochastic OLG model; tax-benefit linkage; endogenous retirement; population ageing;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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