Germany: Selected Issues

The conceptual framework of this paper assumes that macroeconomic performance depends on the interplay between the economic environment and policies. Declining labor shares, wage moderation, and employment performance in Germany and the Netherlands have been presented. A number of policy changes are under way, but additional reforms may be needed to fully reap the benefits of the new economy. The tax reform package marks a radical and constructive shift in German tax policy, and the pension system requires a sea of change in public policy reforms.

Abstract

The conceptual framework of this paper assumes that macroeconomic performance depends on the interplay between the economic environment and policies. Declining labor shares, wage moderation, and employment performance in Germany and the Netherlands have been presented. A number of policy changes are under way, but additional reforms may be needed to fully reap the benefits of the new economy. The tax reform package marks a radical and constructive shift in German tax policy, and the pension system requires a sea of change in public policy reforms.

V. Revamping Germany’s Pension System94

A. Introduction and Summary

155. The government’s pension reform proposal amounts to a sea change in public policy thinking. The proposal tackles one of Germany’s long-standing public policy taboos—it recognizes the need for systemic pension reform as opposed to piecemeal adjustments of the pay-as-you-go (PAYG) public pension pillar. As its main objective, the proposal seeks to diversify retirement income provision by building up a new private funded pillar and by downsizing the present large-scale PAYG pillar. Since Germany’s present public pension system was set up in 1957,95 previous (official) reform proposals had argued that moving to a pension system with a significant role for a private funded pillar would be neither appropriate nor feasible.

156. The reform proposal also contains new thinking on the issue of linking pension contributions and benefits. Pension contributions for the PAYG pillar are presently levied proportionally across the wage distribution (subject to an upper contribution ceiling) and benefits are linked tightly to previous contributions.96 With Germany’s unemployment largely concentrated among lower-skilled workers, the principle of charging proportional contributions across the wage distribution has come under increasing scrutiny.97 The reform proposal suggests subsidizing contributions to the new private funded pillar by providing significant targeted fiscal incentives for lower-paid workers.

157. This chapter reviews and evaluates the pension reform proposal. Section B provides a cross-country perspective on the link between diversification of the pension system and key macroeconomic variables. Section C uses a stylized model to describe the evolution of the key parameters of the public pension system since 1957 and to develop long-term status quo projections (2000–50). Section D describes how the reform proposal affects the long-term status quo projections. The final Section E evaluates the reform proposal.

158. The chapter draws four main conclusions:

  • The reform proposal is a major step in the right direction, namely toward a more diversified pension system. More diversification will enhance the security and credibility of retirement income provision, particularly with population aging looming as a major stress test of the pension system’s capacity to transfer resources from active to retired generations, without disruptive effects on social consensus or macroeconomic stability.

  • A more diversified pension system should improve Germany’s macroeconomic performance by enhancing incentives to work (relative to taking early retirement), allowing the authorities to keep across-the-board pension contribution rates at lower levels than under a no-reform scenario, and spurring more capital market driven financial intermediation. The reform’s impact on Germany’s saving rate is less clear-cut but is likely to be positive.

  • The proposed changes in the size of the public pension pillar are modest and would leave its dominance largely intact. According to the authorities’ relatively optimistic projections of longer-term pension finances, pension contribution rates would still have to rise from 19.3 percent at present to some 22 percent by 2030, only 1¾ percentage points lower than under a status quo baseline. This said, the reform would be vital for opening the door to a more balanced pension system in the future.

  • The projection horizon underlying Germany’s public debate on pension reform is relatively short. The reform proposal’s planning horizon stops in 2030, covering less than one half of an average individual’s average life expectancy.98 The relatively short projection horizon may partly explain the reform’s lack of “parametric ambition” as the full stress of population aging will likely be felt beyond 2030.

B. Germany’s Pension System: A Cross-Country Perspective

159. The main objective of a pension system is to enable individuals to distribute consumption over their lifetimes, an objective that requires a transfer of real resources from active to retired generations. There are two basic vehicles for organizing the real resource transfer from active to retired generations: government promises (PAYG schemes) and financial claims (funded schemes). These two alternative vehicles have different characteristics as regards rates of return, risks (relating to events that are insurable), uncertainties (relating to events that are not insurable), and scope for redistribution within and across generations. Thus, as a general design principle, the objective of providing a robust retirement income system that also takes account of a population’s preferences for redistribution would almost certainly call for a diversified (multipillar) pension system. At the same time, the choice of mix between PAYG and funded pillars has feedback effects on the macroeconomy, with the main channels reflecting labor market incentives, the rate of saving, and the structure of financial intermediation.

160. Although the specific design of public pension pillars varies substantially across industrial countries, it is useful to group PAYG pillars under the three broad conceptual headings “large,” “medium,” and “small.” Large-sized public pension pillars are mandatory schemes with broad coverage and relatively high standard pension replacement rates in the range of 60–80 percent. They usually dominate a country’s retirement income provision, leaving a relatively small role to a private funded pillar. The PAYG systems in many continental European countries would fall under this heading. Medium-sized PAYG schemes are usually also mandatory with wide coverage, but pension benefits provide the average wage earner a pension of only around 40 percent of average wages. Such schemes provide much more scope for diversification. The PAYG schemes in most Anglo-Saxon countries, but also in some continental European countries such as the Netherlands and Switzerland, would fall under this heading. Small-sized PAYG schemes are designed to provide mainly poverty relief to persons not adequately covered by private pension schemes. These schemes are often financed exclusively through budget transfers. Among industrial countries, Australia’s pension scheme exemplifies this type of system.

161. Germany’s system of retirement income provision is one of the least diversified among industrial countries. Its PAYG pillar clearly fits into the “large” category: public pensions account for some 85 percent of total retirement incomes; a standard pension (Eckrente) replaces about 70 percent of average net earnings in the economy; and public pension schemes transfer close to 13 percent of GDP to retired persons, one of the highest public pension-GDP ratios among industrial countries (Figure V-1).

Figure V-1.
Figure V-1.

Industrial Countries: Public Pension Expenditure

(In percent of GDP) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Source: World Bank.1/ Data refer to 1995.2/ Unweighted average.

162. Germany’s small funded pension pillar comprises voluntary company pension plans. Total assets of company pension plans amount to about 15 percent of GDP, of which about half are kept as book reserves on companies’ balance sheets.99 Consistent with Germany’s large public pension scheme, the size of Germany’s second pillar system is relatively modest by industrial country standards (Figure V-2).

Figure V-2.
Figure V-2.

Industrial Countries: Private Pension Fund Assets and Public Pension Expenditure

(In percent of GDP) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Source: World Bank.1/ Data for private pension fiand as sets refer to 1996.

163. In tandem with other labor market institutions including wage setting and the social safety net, Germany’s public pension pillar—as part of the overall social insurance system—has been a key propagation mechanism for adverse labor market shocks. On the labor demand side, sharply rising social (pension) contributions add a further strain to an already badly functioning labor market. In particular, at the labor market’s lower end, high social contribution rates effectively screen out lower-paid jobs above the DM 630 exemption limit for full contributions. On the labor supply side, early retirement serves as one of the escape valves for labor market stress. Indeed, Germany has one of the lower labor force participation rates for older workers among industrial countries. There is a markedly positive correlation between the size of a country’s funded pension pillar and labor force participation of older workers (Figure V-3).

Figure V-3.
Figure V-3.

Industrial Countries: Private Pension Fund Assets and Labor Force Participation Rate of 55–64 Year Old Persons

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Sources: World Bank; and International Labor Office.1/ Data for labor force participation rate refer to 1997.

164. Across industrial countries, there is no clear positive or negative relationship between national saving rates and the size of second pillar systems (Figure V-4). This confirms the largely agnostic stance in the literature on the link between saving and pension regimes (Mackenzie etal. (1997)).

Figure V-4.
Figure V-4.

Industrial Countries: Private Pension Fund Assets and Saving Rate

(In percent of GDP) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Source: World Bank; and OECD.1/ Data for National saving rate refer to average during 1980–90.

165. Building up a significant funded pension pillar could nudge Germany toward a more capital-market driven financial intermediation structure. Lack of deep equity and venture capital markets has often been cited as a bottleneck for growth of businesses in Germany, including by the government’s annual reports on the economy. The relatively small size of Germany’s equity market reflects a number of factors, including the dominant role of sole proprietorships and private limited companies, the competitive climate for loan financing in the banking sector, and the somewhat conservative portfolio behavior of households.100 At the same time, cross-country data on the size of private pension fund assets and stock market capitalization indicate that large funded second pillars are usually associated with relatively large equity markets (Figure V-5).

Figure V-5.
Figure V-5.

Industrial Countries: Private Pension Fund Assets and Stock Market Capitalization

(In percent of GDP) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Sources: World Bank; and DataStream1/ Data for stockmarket capitalization refer to 1999.

C. PAYG Financing: Mechanics and Projections

166. The key parameters of Germany’s public pension finances can be brought out by using an extended version of the PAYG financing constraint:101

α=β(1α)(1τ)Ψ(M/N),(1)

where:

  • α: is the equilibrium contribution rate based on the PAYG principle;

  • β: is the standard pension replacement rate, defined as the ratio between a pension based on 45 years of average contributions and the average net wage in the economy; the average net wage is defined as average gross wage in the economy minus employees’ social insurance contributions and minus wage income taxes;

  • τ: is budget transfer rate, defined as the share of total pension spending financed by budget transfers;

  • Ψ: is the pension system coverage ratio, defined as the ratio between two shares: the share of elderly persons eligible for a pension (as a percent of all elderly persons); and the share of contributors (as a percent of all persons of working age);

  • (M/N): is the elderly dependency ratio, i.e. the ratio between all elderly persons and all persons of working age.

167. In this stylized set up, there are three basic PAYG policy levers. The policy parameters that can be directly set are the two financing PAYG parameters—the level of the required contribution rate (α) and the budget transfer rate (τ)—and the standard pension replacement rate (β). The pension system coverage ratio ((Ψ) can also be influenced by policy decisions, such as labor market policies that affect labor force participation and unemployment rates, pension regulations concerning retirement age, and immigration policies. At the same time, the pension system coverage ratio is also importantly influenced by private households’ preferences, reflected for example in the trend of labor force participation. Finally, the evolution of the PAYG system can be affected by largely exogenous demographic trends, proxied by the elderly dependency ratio (M/N).

168. The trends in PAYG parameters since 1957 indicate significant changes in policy parameters, but the contribution rate has risen inexorably (Figure V-6). In the 1960s and 1970s, a rising dependency rate and reduced budget transfers offset some reduction in the coverage ratio, putting upward pressure on the contribution rate.102 By 1999, the contribution rate had risen to 19.5 percent, compared to 14 percent in 1957.

Figure V-6.
Figure V-6.

Germany: Key Parameters of the Public Pension System, 1957–2000

(In percent) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Sources: Verband Deutscher Rentenversichemngstraeger; and Fund staff estimates.1/ For definition of parameters, see equation (1).

169. Two measures—which were part of the government’s fiscal package that was adopted in 1999—will affect the basic PAYG parameters during 2000–03. First, temporary indexation of pensions to CPI inflation instead of net wages during 2000–01. This measure is reflected in a decline of the standard replacement ratio to 68.5 percent by 2001 (Table V-1).103 Second, the use of additional ecotax revenue, based on stepwise ecotax increases phased in during 2000–03, to finance the pension system, leading to an increase in the budget transfer rate by some 5 percentage points by 2003 (Table V-1).104

Table V-1.

Germany: Public Pension Projections, 2000–50 1/

article image
Sources: Ministry of Labor; and staff estimates and projections.

Covering wage and salary earners’ insurance fund.

Relative to reform proposal status-quo projection.

Beginning in 2011, pension replacement rate of new pensioners (rounded figures).

Defined as population aged 60 and over as a percent of population aged 20–59.

170. Looking further ahead, rapid population aging looms as the main challenge for Germany’s pension system. Based on the Federal Statistical Office’s latest population forecast (lower immigration variant), the elderly dependency ratio—population aged 60 and over as a percent of population aged 20–59—is projected to double over the next fifty years from about 40 percent to 80 percent (Table V-1). Moreover, compared to other main industrial countries, Germany’s projected aging trend is one of the less favorable ones (Figure V-7).

Figure V-7.
Figure V-7.

Main Industrial Countries: Elderly Dependency Ratbs, 2000–2040

(In percent) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Sources: World Bank; and Federal Statistical Office.1/ Elderly dependency ratio is a ratio of population over 60 years old to population aged 20–59.

171. The impact of population aging on Germany’s PAYG finances is illustrated by a staff benchmark projection that assumes a constant pension coverage ratio (Table V-1, Figure V-8). The assumption of a constant pension coverage ratio is roughly equivalent to assuming constant labor force participation, unemployment, and pension eligibility rates. Given the considerable uncertainties attached to projections of some of these variables, the assumption of a constant pension system coverage ratio is often employed as a natural benchmark for comparing long-run pension projections across countries (see Chand and Jaeger (1996)). In this setup, and with budget transfer and pension replacement rates also kept roughly constant, population aging feeds through to the contribution rate, reflected in the benchmark projection by a sharp rise of the contribution rate to some 30 percent by 2030.

Figure V-8.
Figure V-8.

Germany: Status-Quo Projections of Key Parameters of Public Pension System, 2000–2050

(In percent) 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Sources: Ministry of Labor (2000); and staff estimates.1/ For definition of parameters, see equation (1).

172. Over the next 20 years, the reform proposal’s status quo projection is similar to the benchmark projection, but afterwards it shows a markedly more favorable trend for the pension coverage ratio (Figure V-8). The reform proposal projection assumes that during the 2020s the contribution rate is kept in check by a marked decline in the pension coverage ratio. Longer-term pension projections of this type are surrounded by large margins of uncertainty, but these uncertainties are likely to be symmetric around the benchmark scenario. Germany’s labor market performance could conceivably improve markedly in the longer term, particularly under a reform-driven labor market strategy. At the same time, labor market developments could also be less favorable than assumed in the benchmark scenario, particularly if Germany’s growth cycle history during the last three decades would be extrapolated to the future (see Chapter I).

D. Reform Proposal

173. The reform, which envisages a complex set of changes, includes five particularly important measures:

  • Beginning in 2001, a private voluntary pension pillar is set up. The contribution rate to this pillar is assumed to increase linearly from initially 0.5 percent of gross wages to a final level of 4 percent in 2008. Assuming full coverage of all PAYG contributors and following an introductory phase (until 2008), the dynamics of a stylized reserve fund (A(t)) would follow:

    A(t)=[1+r(t)]A(t1)+λ(WN*)μ(t)(WM**),(2)

    where r(t) is the nominal rate of return on assets, λ is the contribution rate (4 percent from 2008 onward), W is the gross wage per worker, N* the number of workers, M** is the number of persons eligible for a funded pension (assuming full coverage, M** should eventually converge to the total number of pensioners M*), and μ(t) is the average pension replacement rate eligible persons receive from the fund, which will vary over time, across persons.

  • Private pension savings will be encouraged through fiscal incentives. First, contributions to the private pillar will be deductible from income tax. However, if pension payouts are subject to income tax, this would only amount to deferring payment of tax until retirement. Second, there will be significant direct fiscal subsidies for low- to medium-income earners. For example, a single-earner income household with two children would, by 2008, receive an annual subsidy of DM 1,320 (unrelated to actual earnings), subject, however, to the condition that at least 1 percent of gross wage earnings is contributed to the private pension fund.

  • The definition of net wages used for indexing public pensions will be adjusted. The contributions to the new pillar will be taken into account in the calculation of net wages for the first pillar. This will reduce the amount of pensions paid out in the first pillar system. In effect, (1−α) on the right hand side of equation (1) would be replaced by (l−α−λ).

  • The standard pension replacement rate for new pensioners will be reduced over time. Starting in 2010, the replacement rate will be cut by 0.3 percentage points each year until 2030, so that by 2030 the standard replacement rate for a new pensioner would amount to about 64 percent (Figure V-9).

  • A number of private saving schemes will qualify as a private pension plan. They will include insurances, mutual funds, and bank saving plans. Providers will, however, have to guarantee the paid-in principal. Wage earners will have the right to participate in company pension schemes and claim the above described fiscal incentives.

Figure V-9.
Figure V-9.

Germany: Projected PAYG Replacement Rates 2000–2030 1/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

Sources: Ministry of Labor; and staff calculations.1/ Standard pension (Eckrente) replacement rate (as percent of average net wage earnings in the economy); from 2011 onwards for new pensioners only.

174. The impact of the proposal on the projected contribution rate is modest (Table V-1). The contribution rate is lowered relative to the status-quo projection, but only by a total 1¾ percentage points by 2030 (Figure V-10). This mainly reflects the limited projected decline in the standard replacement rate. Overall, the parametric changes in contribution and replacement rates are modest, both against the historical trends in these parameters shown in Figure V-6 and against the uncertainties attached to the longer-term projections.

Figure V-10.
Figure V-10.

Germany: Projected PAYG Contribution Rates 2000–2030 2/

Citation: IMF Staff Country Reports 2000, 142; 10.5089/9781451810424.002.A005

2/ Required pension contribution rate to finance pension spending (in percent).

175. The funded pillar is likely to be sizeable. Rewriting the reserve fund accumulation equation in percent of GDP gives:

a(t)[r(t)g(t)]a(t1)+λsp(t),(3)

where g(t) is nominal GDP growth, s is the share of gross wages subject to contributions as a percent of GDP, and p(t) is spending on second-pillar pensions as a percent of GDP. Assuming a steady state nominal rate of return of 5 percent and a nominal GDP growth rate of 3 percent, a second pillar could afford to pay out 3 percent of GDP per year if it accumulated some 50 percent of GDP (in steady state). This second pillar size would be sufficient to top up the replacement rate from the first pillar by about 15 percentage points, to an average of some 80 percent.

176. The cost of fiscal incentives is estimated at some ½ percent of GDP by 2008. At the same time, part of this cost could be clawed back later if pensions from the second pillar are subject to income tax. Moreover, the federal budget would benefit from the reduced amounts of transfers required under a reform scenario.

E. Assessment of Reform Proposal

177. An unreformed pension system would be economically inefficient and risky for Germany’s retirement security in view of the looming aging population challenge. By putting systemic pension reform at the top of the policy agenda, the proposal marks a watershed in public policy thinking. It breaks with past cycles of periodic parametric reform attempts that threatened to undermine the longer-term credibility of the security of retirement income provision.

178. On efficiency grounds, the reform should improve the functioning of the labor market. It diminishes the need for further hikes in the across-the-board level of social contribution rates, which have harmed past labor market performance. The reform could also moderate incentives for early retirement, as the safety valve function of the present PAYG system is reduced. The use of targeted fiscal incentives to reduce the burden of contributions on lower-paid workers in the funded pillar recognizes the particular employment difficulties at the lower end of the labor market. It is noteworthy, however, that multipillar pension systems usually use the public pillar for redistributive purposes, while the private funded pillar is reserved for the insurance and saving objectives of the overall pension system.

179. The reform’s impact on national saving is less clear but could be positive. The empirical literature is largely agnostic on the relationship between different designs of pension systems and saving. In the case of Germany’s reform proposal, participation in the new second pillar system is voluntary and additional savings put into the second pillar could simply substitute for other forms of private savings. On the other hand, there are significant fiscal incentives for participation in the second pillar and younger generations are likely to be more subject to liquidity constraints, factors that could boost aggregate saving through a “forced saving” effect.

180. The reform’s impact on capital markets could boost equity culture in Germany. Across countries, there is a clear positive correlation between the size of private funded pension pillars and stock market capitalization. With the size of the accumulated reserve fund likely to exceed 50 percent of GDP, this should provide a boost to financial intermediation through capital markets.

181. The future trend of pension reforms in the EU will likely be influenced by the German proposals. Given Germany’s size and leadership role in the EU, the decision to move to a more diversified multipillar pension structure could act as a catalyst in the EU pension reform debate, as some convergence of the present social insurance systems in the EU is likely to take place over time.

182. But the reform proposal also raises three issues:

  • With regard to the relative size of pension pillars, the planned downsizing of the public pillar appears to be modest. The envisaged size of the first pillar would still be large-sized, clearly so against the benchmark of countries with more diversified multipillar systems in continental Europe such as the Netherlands and Switzerland (see Figure V-2).

  • The planning horizon featured in Germany’s pension reform debate (some 30 years) is too short. The present planning covers less than one half of an average individual’s average life expectancy. A longer planning horizon would be needed to bring out the full burden that population aging will put on Germany’s pension system in the longer run.

  • International experience with multipillar systems—Australia being a noteworthy example—suggests that the second funded pillar is better designed as mandatory to avoid free rider problems. In Germany, the first-pillar pension insurance scheme is presently supplemented by means-tested social assistance and housing benefits, which, in the case of a single-person household, cumulatively replace about 40 percent of the average net wage in the economy. To the extent that the first pillar is downsized, contributions to the second pillar could amount to a straight tax as the combined pensions (first and second pillar) may just reach the social assistance minimum, thus posing a possible free rider problem.

APPENDIX PAYG Algebra for Germany’s Public Pension System105

183. The basic budget constraint of a PAYG public pension system is given by:

N*(αW)=M*(βW)orα=β(M*/N*),(A.1)

where N* denotes the number of contributors, M* the number of pensioners, α the contribution rate, β the pension replacement rate, and W denotes average gross earnings. The ratio (M*/N*) is the system dependency ratio, i.e. the number of pensioners per contributor. To further approximate the institutional details of the main German pension fund—the wage and salary earners’ fund—two important characteristics need to be added:

  • Pensions are indexed to net wages. This can be modeled by replacing gross wage earnings (W) by net earnings ((l−α)W). This represents a rough approximation as in practice net wages are defined as gross wages minus employees’ social insurance contributions and minus wage income taxes.

  • And a (fixed portion) of pension spending τ is financed by budget transfers. Inserting these characteristics in (1) gives:

α=β(1-α)(1τ)(M*/N*)(A.2)

184. The link between public pension finances and population aging can be brought out by assuming that the number of pensioners is proportional to the number of persons aged 60-and-over: M* = δM, while the number of contributors is proportional to the number of persons at working age: N* = ηN. Thus, (M/N) is the elderly dependency ratio, a variable that depends only on demographic developments. Moreover, if the symbol Ψ is used to stand in for the ratio (δ/η), termed the pension system’s “coverage ratio,” the equation describing the evolution of the PAYG system’s equilibrium pension contribution rate is:

α=β(1-α)(1τ)Ψ(M/N),(A.3)

which corresponds to equation (1) in the main text.

185. Equation (A.3) is mute on the issue of income taxes on pensions. This reflects an idiosyncrasy of Germany’s income tax system: the income tax code assumes that only about 25 percent of public pension benefits represent previously untaxed income, an assumption that amounts in practice to a full income tax exemption. This assumption is, however, difficult to rationalize. It is based on the presumptions that: (i) all pension contributions were subject to income tax (although only employees’ pension contributions are subject to tax) and that public pension benefits include a tax-free interest income component of about 25 percent.

References

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  • Prognos (1998), Prognos-Gutachten 1998: Auswirkungen veränderter ökonomischer und rechtlicher Rahmenbedingungen aufdie gesetzliche Rentenversicherung in Deutschland, edited by: Verband Deutscher Rentenversicherungsträger, Frankfurt.

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94

Prepared by Albert Jaeger.

95

The historical roots of Germany’s public pension system reach back to Bismarck’s invalidity and old-age insurance law of 1889, which set up the first modern public pension scheme.

96

A reduced pension contribution rate of 12 percent (compared to a statutory rate of 19.3 percent in 2000) applies to workers holding small-time jobs (less than 15 work hours per week) that earn less than DM 630 per month.

97

Pilot projects are under way in four regions of Germany to study the labor market effects of fiscal subsidies at the lower end of the labor market.

98

One possible rule of thumb for projecting the longer-term trends of pension finances—used for example by the Social Security and Medicare Boards of Trustees in the United States—is to base the projection horizon on average life expectancies (75 years in the case of the U.S.).

101

The derivation of equation (1) is described in the appendix. This PAYG equation is strict in the sense that it ignores that Germany’s main public pension fund—the wage and salary earners’ fund—is required by law to maintain a small fluctuation reserve (equivalent to at least one month of pension expenditure).

102

These calculations were based on available time series for contribution rate, budget transfer rate, standard pension replacement rate, and the elderly dependency ratio. The time series for the pension system coverage ratio was calculated using equation (1).

103

The reform proposal would, however, suspend CPI indexation in 2001 and redefine the net wage concept; see next section for details.

104

This baseline projection assumes that the demographic factor that would have reduced pensions in relation to increases in life expectancies—and which was suspended by the present government—will not be reinserted in the pension benefit formula beginning in 2002.

105

This follows the analytical framework used in Chand and Jaeger (2000) to discuss policy options for reforming PAYG pension systems.

Germany: Selected Issues
Author: International Monetary Fund
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    Industrial Countries: Public Pension Expenditure

    (In percent of GDP) 1/

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    Industrial Countries: Private Pension Fund Assets and Public Pension Expenditure

    (In percent of GDP) 1/

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    Industrial Countries: Private Pension Fund Assets and Labor Force Participation Rate of 55–64 Year Old Persons

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    Industrial Countries: Private Pension Fund Assets and Saving Rate

    (In percent of GDP) 1/

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    Industrial Countries: Private Pension Fund Assets and Stock Market Capitalization

    (In percent of GDP) 1/

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    Germany: Key Parameters of the Public Pension System, 1957–2000

    (In percent) 1/

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    Main Industrial Countries: Elderly Dependency Ratbs, 2000–2040

    (In percent) 1/

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    Germany: Status-Quo Projections of Key Parameters of Public Pension System, 2000–2050

    (In percent) 1/

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    Germany: Projected PAYG Replacement Rates 2000–2030 1/

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    Germany: Projected PAYG Contribution Rates 2000–2030 2/