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Rates of return and early retirement disincentives: Evidence from a German pension reform

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  • Lüthen, Holger

Abstract

To counteract the financial pressure emerging in aging societies, statutory pay-as-you-go pension schemes are undergoing fundamental reforms in many Western countries. Starting with cohort 1937, Germany introduced permanent pension deductions for early retirement. This paper examines the evolution of the profitability of pension contributions against the background of this reform for cohorts 1935-1945. I measure the profitability with the internal rate of return (IRR) and use high quality administrative data. For men the IRR declines from 2.4% to 1.2% and for women from 5.2% to 3.7%. The results suggest that the deductions introduced by the reform only cause some part of this trend. The majority of the trend, about 75%-80%, is caused by increased pension contributions.

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  • Lüthen, Holger, 2014. "Rates of return and early retirement disincentives: Evidence from a German pension reform," Discussion Papers 2014/15, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:201415
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    Cited by:

    1. 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).
    2. Holger Lüthen, 2014. "Rente und Reform: Lehren aus der Vergangenheit," DIW Roundup: Politik im Fokus 14, DIW Berlin, German Institute for Economic Research.
    3. Regina T. Riphahn & Frederik Wiynck, 2017. "Fertility effects of child benefits," Journal of Population Economics, Springer;European Society for Population Economics, vol. 30(4), pages 1135-1184, October.
    4. Kemptner, Daniel & Haan, Peter & Lüthen, Holger, 2017. "The increasing longevity gap by lifetime earnings and its distributional implications," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168278, Verein für Socialpolitik / German Economic Association.
    5. Gentiana Sharku, 2017. "Profitability on Albanian Supplementary Social Insurance Scheme: "Academic Titles" Case," International Business Research, Canadian Center of Science and Education, vol. 10(3), pages 215-220, March.

    More about this item

    Keywords

    pensions; reform; early retirement; disincentives; pay-as-you-go; rates of return; Germany;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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