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The German Retirement Benefit Formula: Drawbacks and Alternatives

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  • Friedrich Breyer
  • Mathias Kifmann

Abstract

Wir diskutieren eine Reihe von Problemen der Rentenformel in der deutschen gesetzlichen Rentenversicherung (GRV). Wir zeigen, dass Bev¨olkerungsgruppen mit ¨uberdurchschnittlicher Lebenserwartung, insbesondere die besser Verdienenden, von den ¨ubrigen Versicherten subventioniert werden, da die Rentenformel Unterschiede in den gruppenspezifischen Lebenserwartungen nicht ber¨ucksichtigt. Außerdem f¨uhrt die Formel zu unerw¨unschten langfristigen Wirkungen, wenn die Beitragsbemessungsgrenze erh¨oht oder die Pflichtmitgliedschaft ausgeweitet wird, wenn die Lebenserwartung steigt oder das Bev¨olkerungswachstum abnimmt. Wir schlagen zwei Alternativen vor, die die gruppenspezifische Lebenserwartung ber¨ucksichtigen. Wir zeigen, dass insbesondere die Interne-Rendite-Formel, die jeden Euro an Beitr¨agen mit der internen Rendite des Umlageverfahrens belohnt, gegen¨uber der gegenw¨artigen Formel ¨uberlegen ist. In this paper we identify a number of objectionable features of the German retirement benefit formula. We show that groups of insureds with higher than average life expectancy, in particular high-income groups, are subsidized by the rest of the membership because the formula neglects differences in group-specific life expectancy. Furthermore, the current formula leads to undesirable long-run effects if the earnings ceilings is raised, mandatory membership is extended, life expectancy rises or the rate of population growth declines. We present two alternative formulas which take group-specific life expectancy into account. In particular, a return-rate formula which rewards each Euro of contributions with the internal rate of return of the pay-as-you-go pension system proves to be superior to the current formula.

Suggested Citation

  • Friedrich Breyer & Mathias Kifmann, 2003. "The German Retirement Benefit Formula: Drawbacks and Alternatives," Discussion Papers of DIW Berlin 326, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp326
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    References listed on IDEAS

    as
    1. 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.
    2. Robert Fenge & Silke Übelmesser & Martin Werding, 2002. "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence," CESifo Working Paper Series 743, CESifo Group Munich.
    3. Mathias Kifman & Dirk Schindler, 2000. "Smoothing the Implicit Tax Rate in a Pay-as-you-go Pension System," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(3), pages 261-261, May.
    4. ûystein ThÛgersen, 1998. "A note on intergenerational risk sharing and the design of pay-as-you-go pension programs," Journal of Population Economics, Springer;European Society for Population Economics, vol. 11(3), pages 373-378.
    5. Mathias Kifmann, 2001. "Langfristige Folgen einer Einbeziehung der Selbständigen in die gesetzliche Rentenversicherung," Discussion Papers of DIW Berlin 251, DIW Berlin, German Institute for Economic Research.
    6. Homburg, Stefan & Richter, Wolfram, 1990. "Eine effizienzorientierte Reform der GRV," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 183-191..
    7. Klaus Beckmann, 2000. "A Note on the Tax Rate implicit in Contributions to Pay-as-you-go Public Pension Systems," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(1), pages 1-63, September.
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    Citations

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    Cited by:

    1. Axel Börsch-Supan & Anette Reil-Held & Christina Benita Wilke, 2003. "Der Nachhaltigkeitsfaktor und andere Formelmodifikationen zur langfristigen Stabilisierung des Beitragssatzes zur GRV," MEA discussion paper series 03030, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    2. 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, pages 223-241.
    3. Börsch-Supan, Axel, 2007. "Rational pension reform," Papers 07-25, Sonderforschungsbreich 504.
    4. 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.
    5. Axel Börsch-Supan, 2007. "Rational Pension Reform," MEA discussion paper series 07132, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    6. Knell, Markus, 2010. "How automatic adjustment factors affect the internal rate of return of PAYG pension systems," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(01), pages 1-23, January.
    7. Breyer, Friedrich & Franz, Wolfgang & Homburg, Stefan & Schnabel, Reinhold & Wille, Eberhard, 2004. "Reform der sozialen Sicherung," EconStor Books, ZBW - German National Library of Economics, number 92399.
    8. Axel Börsch-Supan & Anette Reil-Held & Christina Benita Wilke, 2003. "How to make a Defined Benefit System Sustainable: The Sustainability Factor in the German Benefit Indexation Formula," MEA discussion paper series 03037, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

    More about this item

    Keywords

    pay-as-you-go pension systems; implicit taxation; intra- and intergenerational equity;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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