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The German statutory pension scheme: Balance sheet, cross-sectional internal rates of return and implicit tax rates

Listed author(s):
  • Metzger, Christoph

We present a framework for accounting of the German statutory pension scheme and estimate a balance sheet for the years 2005 until 2012. Extending and applying the methodology proposed by Settergren and Mikula (2005), we estimate the cross-sectional internal rates of return of the German pension scheme over this period. We are able to show that the cross-sectional internal rate of return is mainly financed by increasing contributions and by changing the liabilities not backed by assets. Additionally, our results reveal that from an expenditure perspective, the major part of the internal rate of return is resulting from changing longevity rather than indexation of pension entitlements. Finally, we prove that from a cross-sectional perspective the implicit tax of a pension scheme can mainly be interpreted as an “implicit wealth tax” on pension wealth and subsequently present empirical estimates for these cross-sectional implicit tax rates.

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Paper provided by University of Freiburg, Research Center for Generational Contracts (FZG) in its series FZG Discussion Papers with number 63.

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Date of creation: 2016
Handle: RePEc:zbw:fzgdps:63
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  1. Robert Fenge & Silke Ãœbelmesser & Martin Werding, 2002. "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence," CESifo Working Paper Series 743, CESifo Group Munich.
  2. María del Carmen Boado-Penas & Salvador Valdés-Prieto & Carlos Vidal-Meliá, 2008. "The Actuarial Balance Sheet for Pay-As-You-Go Finance: Solvency Indicators for Spain and Sweden," Fiscal Studies, Institute for Fiscal Studies, vol. 29(1), pages 89-134, 03.
  3. Alexander Ludwig & Michael Reiter, 2010. "Sharing Demographic Risk--Who Is Afraid of the Baby Bust?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 83-118, November.
  4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts: A Meaningful Alternative to Deficit Accounting," NBER Chapters,in: Tax Policy and the Economy, Volume 5, pages 55-110 National Bureau of Economic Research, Inc.
  5. Torben Andersen, 2014. "Intergenerational redistribution and risk sharing with changing longevity," Journal of Economics, Springer, vol. 111(1), pages 1-27, February.
  6. Gottardi, Piero & Kubler, Felix, 2011. "Social security and risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1078-1106, May.
  7. Ronald D. Lee, 1994. "Population Age Structure, Intergenerational Transfer, and Wealth: A New Approach, with Applications to the United States," Journal of Human Resources, University of Wisconsin Press, vol. 29(4), pages 1027-1063.
  8. Robert Fenge & Martin Werding, 2003. "Ageing and Fiscal Imbalances Across Generations: Concepts of Measurement," CESifo Working Paper Series 842, CESifo Group Munich.
  9. Settergren, Ole & Mikula, Boguslaw D., 2005. "The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(02), pages 115-138, July.
  10. Settergren, Ole & Mikula, Boguslaw D., 2005. "The Rate of Return of Pay-As-You-Go Pension Systems: A More Exact Consumption-Loan Model of Interest," Discussion Paper 249, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  11. Geyer, Johannes & Steiner, Viktor, 2014. "Future public pensions and changing employment patterns across birth cohorts," Journal of Pension Economics and Finance, Cambridge University Press, vol. 13(02), pages 172-209, April.
  12. Dirk Krueger & Felix Kubler, 2006. "Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?," American Economic Review, American Economic Association, vol. 96(3), pages 737-755, June.
  13. Klaus Kaier & Christoph Müller, 2015. "New figures on unfunded public pension entitlements across Europe: concept, results and applications," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(4), pages 865-895, November.
  14. Robert Fenge & Martin Werding, 2004. "Ageing and the tax implied in public pension schemes: simulations for selected OECD countries," Fiscal Studies, Institute for Fiscal Studies, vol. 25(2), pages 159-200, June.
  15. Knell, Markus, 2010. "How automatic adjustment factors affect the internal rate of return of PAYG pension systems," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(01), pages 1-23, January.
  16. Gordon, Roger H. & Varian, Hal R., 1988. "Intergenerational risk sharing," Journal of Public Economics, Elsevier, vol. 37(2), pages 185-202, November.
  17. 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.
  18. Carlos Vidal-Melia & Maria Carmen Boado-Penas, 2011. "Compiling the Actuarial Balance for Pay-As-You-Go Pension Systems. Is it better to use the Hidden Asset or the Contribution Asset?," Post-Print hal-00762894, HAL.
  19. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 16-27, February.
  20. Metzger, Christoph, 2016. "Accounting of pay-as-you-go pension schemes using accrued-to-date liabilities: An example for Switzerland," FZG Discussion Papers 59, University of Freiburg, Research Center for Generational Contracts (FZG).
  21. Klaus Beckmann, 2000. "A Note on the Tax Rate implicit in Contributions to Pay-as-you-go Public Pension Systems," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(1), pages 1-63, September.
  22. Schnabel, Reinhold, 1998. "Rates of return of the German pay-as-you-go pension system," Papers 98-56, Sonderforschungsbreich 504.
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