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Fairness of Public Pensions and Old-Age Poverty

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  • Friedrich Breyer
  • Stefan Hupfeld

Abstract

In several OECD countries, public pay-as-you-go financed pension systems have undergone major reforms in which future retirement benefit promises have been scaled down. A consequence of these reforms is that especially in countries with a tight tax-benefit linkage, the retirement benefit claims of low-income workers might not even exceed the minimum income guarantee which the government provides the aged. Recently, some German politicians have criticized this likely development because it was unjust that persons who have paid contributions over a long working life end up with no higher benefits than people who have never worked or paid any contributions. However, the government defended the current retirement benefit formula with the argument that every Euro paid as contributions had exactly the same value in generating future retirement benefits. But this logic has been questioned recently, e.g. by Breyer and Hupfeld (2009), since the value of a contributed Euro depends on the life expectancy of the individual, which is positively correlated with annual income. In that earlier paper, we introduced the concept of "distributive neutrality", which takes income-group-specific differences in life expectancy into account. The present paper estimates the relationship between annual earnings and life expectancy of German retirees empirically and shows how the formula that links benefits to contributions would have to be modified to achieve distributive neutrality. We compare the new formula to the benefit formulas in other OECD countries and analyze a data set provided by the German Pension Insurance Office on a large cohort of pensioners to find out how the old-age poverty rate would be affected by the proposed change of the benefit formula. Finally, we discuss other possible effects of a change in the benefit formula, especially on the labour supply of different earnings groups.

Suggested Citation

  • Friedrich Breyer & Stefan Hupfeld, 2008. "Fairness of Public Pensions and Old-Age Poverty," Discussion Papers of DIW Berlin 817, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp817
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    References listed on IDEAS

    as
    1. Stefan Traub & Tim Krieger, 2008. "Back to Bismarck? Shifting Preferences for Intragenerational Redistribution in OECD Pension Systems," LIS Working papers 485, LIS Cross-National Data Center in Luxembourg.
    2. 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.
    3. Robert Fenge & Silke Uebelmesser & Martin Werding, 2006. "On the Optimal Timing of Implicit Social Security Taxes Over the Life Cycle," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(1), pages 68-107, March.
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    Citations

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    Cited by:

    1. Gilles Le Garrec, 2015. "Increased longevity and social security reform: questioning the optimality of individual accounts when education matters," Journal of Population Economics, Springer;European Society for Population Economics, pages 329-352.
    2. Haan, Peter & Kemptner, Daniel & Lüthen, Holger, 2017. "The Rising Longevity Gap by Lifetime Earnings: Distributional Implications for the Pension System," IZA Discussion Papers 11121, Institute for the Study of Labor (IZA).
    3. repec:clr:wugarc:y:2016v:42i:03p:465 is not listed on IDEAS
    4. 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.
    5. Kallweit, Manuel & Fehr, Hans & Kindermann, Fabian, 2011. "Should pensions be progressive? Yes, at least in Germany!," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48708, 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, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    7. repec:clr:wugarc:y:2016v:42i:3p:465 is not listed on IDEAS
    8. Stefan Arent & Wolfgang Nagl, 2010. "A Fragile Pillar: Statutory Pensions and the Risk of Old-Age Poverty in Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(4), pages 419-441, December.
    9. Friedrich Breyer & Normann Lorenz & Thomas Niebel, 2015. "Health care expenditures and longevity: is there a Eubie Blake effect?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(1), pages 95-112, January.
    10. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2013. "Gegen eine rückwärtsgewandte Wirtschaftspolitik. Jahresgutachten 2013/14," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201314.
    11. Fehr, Hans & Kallweit, Manuel & Kindermann, Fabian, 2013. "Should pensions be progressive?," European Economic Review, Elsevier, vol. 63(C), pages 94-116.
    12. Fehr, Hans & Jokisch, Sabine & Kallweit, Manuel & Kindermann, Fabian & Kotlikoff, Laurence J., 2013. "Generational Policy and Aging in Closed and Open Dynamic General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, Elsevier.
    13. 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, October.

    More about this item

    Keywords

    Social security; life expectancy; poverty; redistribution;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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