Implicit Pension Debt and the Role of Public Pensions for Human Capital Accumulation: An Assessment for Germany

Implicit pension debt involved in existing pay-as-you-go public pension schemes is nowadays seen as an important determinant of the long-term sustainability of general government finances. Explicit up-dated calculations regarding its size are however largely lacking. The present paper takes up the lessons that emerge from the relevant literature and estimates the amount of implicit pension debt for the German Statutory Pension Scheme under the current legal framework as well as over the series of reforms that have been enacted during the last fifteen years. It is demonstrated that, through these reforms, implicit liabilities have been reduced substantially but are nevertheless still sizeable. Even if future contribution rates are increased as prescribed by current rules, there will be a notable gap in the German public pension scheme's total balance sheet. In the second part of the paper, it is also discussed that, by the way they are conventionally designed, unfunded pension schemes may have a negative impact on human capital accumulation and, hence, on future contributions. A proposal for how this source of potential intrinsic instability could be removed by redesigning the German public pension scheme is then sketched.