Rates of Return of the German Pay-As-You-Go Pension System
Due to population aging, contribution rates of the mandatory German pay-as-you-go pension system are expected to increase dramatically during the next decades. This paper estimates the impact on the expected returns of contributions for different cohorts. I show that rates of return for younger cohorts will be between zero and one percent, depending on the demographic and economic scenarios; for some demographic groups they become negative. The implicit tax rates reach levels of around two-thirds of contributions for the youngest cohorts. If decreasing returns reduce incentives for labor supply and system participation, the whole system may become unsustainable. Indeed, I find empirical evidence for a recent decline of voluntary contributions and for a substitution away from taxable employment.
|Date of creation:||02 Jul 1997|
|Date of revision:|
|Note:||I wish to thank Axel Börsch-Supan, Hans Fehr, Isabel Gödde, Joachim Winter and seminar participants at the Universities of Mannheim and Frankfurt/Main for helpful comments on earlier versions of this paper. Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.|
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- Börsch-Supan, Axel & Schnabel, Reinhold, 1997.
"Social security and retirement in germany,"
Sonderforschungsbereich 504 Publications
97-20, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Schnabel, Reinhold, 1998. "The Declining Participation in the German PAYG-Pension System," Sonderforschungsbereich 504 Publications 99-42, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Friedrich Breyer & Klaus Stolte, 2001.
"Demographic change, endogenous labor supply and the political feasibility of pension reform,"
Journal of Population Economics,
Springer;European Society for Population Economics, vol. 14(3), pages 409-424.
- Friedrich Breyer & Klaus Stolte, 2000. "Demographic Change, Endogenous Labor Supply and the Political Feasibility of Pension Reform," Discussion Papers of DIW Berlin 202, DIW Berlin, German Institute for Economic Research.
- Borsch-Supan, Axel & Schnabel, Reinhold, 1998. "Social Security and Declining Labor-Force Participation in Germany," American Economic Review, American Economic Association, vol. 88(2), pages 173-78, May.
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