Prepared by Albert Jaeger.
A survey of the institutional structure of Germany’s pension system is provided by Monika Queisser, Pensions in Germany, Policy Research Working Paper No. 1664 (Washington: The World Bank, 1996).
The roots of Germany’s public pension scheme stretch back to the invalidity and old-age insurance law of 1889, which established the first modern public pension scheme in industrial countries.
Pensions for civil servants are financed from the territorial authorities’ budgets. A recent government report on the future development of the cost of civil service pensions (Versorgungsbericht 1996) suggested that total spending on civil service pensions would rise from 1.9 percent of GDP in 1996 to 2.1 percent of GDP in 2008, but then remain around the 2 percent of GDP until about 2030, and decline afterwards to 1.6 percent of GDP by 2040. The authorities’ projections for civil service pension cost are below the staffs previous projection (by about ½ percent of GDP in 2010 and afterwards) reported in SM/96/227, mainly on account of different assumptions regarding the effect of changes in early retirement rules for civil servants after 2002.
equation (1) ignores the WSEF’s small fluctuation reserve—which is required to amount to at least one month of pension expenditure.
See Association of German Pension Insurance Funds (Verband Deutscher Rentenversicherungsträger (VDR)), Versicherungsfremde Leistungen—Sachgerecht Finanzieren! (Frankfurt: VDR, 1997).
See Deutsche Bundesbank, “Expenditure on Social Assistance Since the Mid-Eighties,” Monthly Report April 1996, Vol. 45, No 5, pp. 33-50.
E.g., the flat tax rate on contributions to the separate pension funds and insurance companies was increased from 15 percent to 20 percent at the beginning of 1996. For further details on Germany’s second-pillar system see Peter Ahrend, “Pension Financial Security in Germany”, in: Securing Employer-Based Pensions: An International Perspective, edited by Bodie, Zvi, Mitchell, S. Olivia, and John A. Turner (Philadelphia: University of Pennsylvania Press, 1996), pp. 73-104.
See E. Philip Davis, “The Structure, Regulation and Performance of Pension Funds in Nine Industrial Countries,” World Bank Working Paper No. 1229 (Washington: World Bank, 1993). According to this source, second-pillar pension fund assets in Switzerland, the United Kingdom, and the United States exceeded 50 percent of GDP at the end of 1991.
The net asset holding data include financial and residential assets and cover west Germany only. See Deutsche Bundesbank, “Households’ Asset Situation in Germany,” Monthly Report October 1993, Vol. 45, No. 10, pp. 19-31.
Based on the “upper” and “lower variant” of the Prognos-Gutachten 1995. See Association of German Pension Fund Insurers (VDR), Prognos-Gutachten 1995 (Frankfurt: VDR, 1995). Further details of the 1992 Pension Reform Act are surveyed in SM/96/11 (pp. 12-16).
The Action Program established the specific target of reducing the overall social security contribution rate from 40.6 percent in 1996 to below 40 percent by the year 2000. In 1997, the overall social security contribution rate increased to 42.1 percent, and, without further reform measures, it was projected to increase to about 42.5 percent in the year 2000.
See Horst-Wolf Müller, “Änderungen der Finanzierung und finanzielle Auswirkungen des WFG,” Deutsche Rentenversicherung 1-2/1997, pp. 78-93.
The commission comprised 16 members, in the main pension experts from public pension funds, universities, and research institutes.
In July 1997 the Association of German Pension Insurance Funds (VDR) submitted estimates of the effects of the draft pension law proposals to the Committee for Labor and Social Affairs of the Bundestag that were broadly in line with the Commission’s estimates reported in Table V-1.
This proposal follows the pioneering example of earlier Swedish reform efforts to stabilize pension spending by taking account of changes in life expectancies in pension benefit adjustments (see SM/96/11 for a description of Sweden’s recent pension efforts).
Moreover, and also deviating from the Blüm Commission proposals, the draft pension law proposed to increase the generosity of non-contributory pension rights related to raising children. The cost of this measure would mainly come due toward the end of the projection period and would amount to about ¼ percent of GDP by 2030.
The Blüm Commission also proposed to overhaul provisions for survivor pensions once data from a major survey on the income situation of women become available and to strengthen incentives for occupational pension schemes and individual retirement income provision.
The Prognos-Gutachten 1995 was commissioned by the Association of German Pension Insurance Funds, an association of the different first-pillar pension schemes. In its publications, this association has always been strongly in favor of maintaining the basic characteristics of the present pension system. Baseline projections prepared by more independent institutions—perhaps along the lines of the regular actuary reports published by the Board of Trustees in the United States and the Government Actuary’s Department in the United Kingdom—could accordingly provide a more neutral foundation for reform proposals.
The World Bank’s population projections for Germany are close to the “lower variant” (i.e., pessimistic variant) of the population projection in the Prognos-Gutachten 1995.
The model and macroeconomic assumptions underlying the staff projection are detailed in Sheetal K. Chand and Albert Jaeger, Aging Populations and Public Pension Schemes, Occasional Paper No. 147 (Washington: International Monetary Fund, 1996).
The distribution of these risks between contributing and retired generations may change over time because of population aging. In particular, persons in the age group 55 years-and-above are projected to gain an absolute majority of votes in Germany after 2025, implying a significant shift in political power from the contributing population to the retired population.
For example, simulations of life-cycle general equilibrium models suggest that the welfare gains from public pension insurance against living longer than expected decrease significantly at pension replacement rates above 40 percent. See Victor H. Validvia, “The Insurance Role of Social Security: Theory and Lessons for Policy Reform,” IMF Working Paper No. 97/1, April 1997.
This intragenerational inequity bias is probably re-enforced by the comparatively lower life expectancies of lower-income earners.
See, e.g., the World Bank’s study (1994), Averting the Old Age Crisis (Oxford: Oxford University Press), and Laurence J. Kotlikoff (1996), “Privatizing Social Security at Home and Abroad.” American Economic Review, Papers and Proceedings, Vol. 86, No.2 pp. 368-72.
On the effects of pension systems of savings, see the survey paper by G. A. Mackenzie, Philip Gerson, and Alfredo Cuevas, Pension Regimes and Saving, Occasional Paper No. 151 (Washington: International Monetary Fund, 1997).
See, e.g., chapters 6 and 9 in Organization for Economic Co-Operation and Development (OECD), The OECD Jobs Study, Evidence and Explanations, Part II—The Adjustment Potential of the Labour Market (Paris: OECD, 1994).
It has been estimated that the pension benefit reductions for early retirement introduced by the 1992 Pension Act would leave average effective retirement ages by about ¾ of a year above average retirement ages under an actuarially fair benefit reduction system, necessitating to keep the contribution rate about ¾ percentage points higher than under an actuarially fair system. See Axel Börsch-Supan (1992), “Population Aging, Social Security Design, and Early Retirement,” Journal of Institutional and Theoretical Economics, 148, pp. 533-57.
See, e.g., the Government’s Jahreswirtschaftsbericht 1997 (1997, pp. 45-47).
E.g., in its 1996/97 annual report, the German Council of Economic Experts (Sacherverständigenrai) has argued in favor of shifting a significant part of retirement income provision to a funded system.
For example, assuming a remaining life span of 20 years and labor productivity growth of 1½ percent, the net replacement rate would decline by about 25 percentage points even though real benefits were constant.
For a discussion of political risks in the context of pension systems, see Peter Diamond, “Insulation of Pensions from Political Risk,” NBER Working Paper No. 4895 (Cambridge, Massachusetts: National Bureau of Economic Research, October 1994).
The sustainable contribution rate is calculated as the constant contribution rate over 1995-2050 that equalizes the net asset position of the WSEF in 1995 (assumed to be zero) with the net asset position in 2050.
Calculations of internal real rates of return for the U.S. social security system covering cohorts retiring during 1995-2030 suggest that partial prefunding can mitigate intergenerational inequities. See Eugene C. Steuerle and Jon M. Bakija, Retooling Social Security for the 21st Century: Right and Wrong Approaches to Reform (Washington: Urban Institute Press, 1994).
For a discussion of the issues involved in moving from a PAYG pension system to a private funded scheme, see Robert Holzmann, On the Economic Benefits and Fiscal Requirements of Moving from Unfunded to Funded Pensions, AICGS Research Report No. 4 (Washington: American Institute for Contemporary German Studies, 1997).
See Chand and Jaeger,”Aging Populations and Public Pension Schemes”
For a discussion of the experience of selected industrial countries with public insurance of private funded pension schemes, see James E. Pesando, “The Government’s Role in Insuring Pensions”, in: Securing Employer-Based Pensions: An International Perspective, edited by Bodie, Zvi, Mitchell, S. Olivia, and John A. Turner (Philadelphia: University of Pennsylvania Press, 1996), pp. 73-104.