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Profitability of Pension Contributions: Evidence from Real-Life Employment Biographies

Carsten Schröder

affiliation not provided to SSRN

September 2010

DIW Berlin Discussion Paper No. 1057

Micro-econometric intra-cohort profitability analyses of pay-as-you-go (PAYG) pension contributions are rare. We use representative employment histories of a birth cohort of German PAYG pension insurants retiring in year 2005 to econometrically examine the determinants of the profitability of such contributions using nominal internal rates of return (IRR) as profitability measure. When future nominal pension entitlements are frozen at today's level, average IRR is slightly above three percent. At the same time, IRR differs substantially across beneficiaries. IRR is increasing in beneficiaries' remaining life expectancies at retirement and in the length of non-contribution periods resulting, for example, from child care or care for an ill partner. Due to survivor pensions, married insurants benefit from higher IRR as compared to the non-married. Interestingly, IRR is decreasing in insurants' earnings capacity, indicating that the system entails an intra-cohort progressive element.

Number of Pages in PDF File: 37

Keywords: Pay-as-you-go, pensions, rate of return, redistribution, employment biography

JEL Classification: D02, D14, D39, D91, H55

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Date posted: September 22, 2010  

Suggested Citation

Schröder, Carsten, Profitability of Pension Contributions: Evidence from Real-Life Employment Biographies (September 2010). DIW Berlin Discussion Paper No. 1057. Available at SSRN: http://ssrn.com/abstract=1680275 or http://dx.doi.org/10.2139/ssrn.1680275

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Carsten Schröder (Contact Author)
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