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How risky is the German pension system? The volatility of the internal rates of return

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  • Heidler, Matthias
  • Raffelhüschen, Bernd

Abstract

In this paper we analyze exemplarily the volatility of the internal rates of return of the German pension system over the life-cycle of an individual born in 1957. The outcome is compared to an alternative defined-contribution or defined-benefit policy. Based on the actual data, our results show the volatility of the internal rate of return to be significantly higher under the actual policy. We furthermore find that the sustainable internal rates of return are close to zero for the youngest male cohorts and positive for females for optimistic growth scenarios. In more realistic scenarios things turn worse.

Suggested Citation

  • Heidler, Matthias & Raffelhüschen, Bernd, 2005. "How risky is the German pension system? The volatility of the internal rates of return," FZG Discussion Papers 6, University of Freiburg, Research Center for Generational Contracts (FZG).
  • Handle: RePEc:zbw:fzgdps:6
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    References listed on IDEAS

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    1. Axel Börsch-Supan, 2005. "Risiken im Lebenszyklus Theorie und Evidenz," MEA discussion paper series 05069, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    2. Auerbach, Alan J & Gokhale, Jagadeesh & Kotlikoff, Laurence J, 1992. " Generational Accounting: A New Approach to Understanding the Effects of Fiscal Policy on Saving," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 303-318.
    3. John McHale, 2001. "The Risk of Social Security Benefit-Rule Changes: Some International Evidence," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 247-290 National Bureau of Economic Research, Inc.
    4. Christoph Borgmann & Matthias Heidler, 2003. "Demographics and Volatile Social Security Wealth: Political Risks of Benefit Rule Changes in Germany," CESifo Working Paper Series 1021, CESifo Group Munich.
    5. Börsch-Supan, Axel, 2005. "Risiken im Lebenszyklus: Theorie und Evidenz," Sonderforschungsbereich 504 Publications 05-05, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    6. Muellbauer, John, 1992. " Generational Accounting: A New Approach to Understanding the Effects of Fiscal Policy on Saving: Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 319-322.
    7. Axel Börsch-Supan, 2005. "Risiken im Lebenszyklus: Theorie und Evidenz," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(4), pages 449-469, November.
    8. David Bradford, 1991. "Tax Policy and the Economy, Volume 5," NBER Books, National Bureau of Economic Research, Inc, number brad91-1, April.
    9. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter.
    10. John Y. Campbell & Martin Feldstein, 2001. "Risk Aspects of Investment-Based Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number camp01-1, April.
    11. Börsch-Supan, Axel, 2005. "Risiken im Lebenszyklus : Theorie und Evidenz," Papers 05-05, Sonderforschungsbreich 504.
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    More about this item

    Keywords

    Risk; internal rate of return; sustainability;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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