Should Pensions Be Progressive? Yes, at Least in Germany!

39 Pages Posted: 19 Apr 2011

See all articles by Hans Fehr

Hans Fehr

University of Würzburg - Institute of Economics and Social Sciences

Manuel Kallweit

affiliation not provided to SSRN

Fabian Kindermann

University of Regensburg; Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2011

Abstract

Recent reforms that aim at reducing the upcoming burdens of population ageing might seriously harm low income individuals. An increase in old-age poverty and disability will be the result. Under this prospect, the present paper quantitatively characterizes the optimal progressivity of unfunded pension systems in an overlapping generations model with idiosyncratic income, disability and longevity risk as well as endogenous labor supply at the intensive and extensive margin. Focusing on the German pension system, our model features the most recent demographic projections and distinguishes three skill classes with skill-dependent risk profiles. Starting from a baseline path that reflects a purely earnings related pension system, we increase the degree of progressivity and compute the resulting macroeconomic, welfare and efficiency effects.

For our most preferred parametrization we find an optimal flat-rate pension share of 40 percent. This indicates that in Germany recent reforms that aim at raising retirement age and cutting benefit levels should be complemented by increases in pension progressivity, since improved insurance provision dominates higher labor supply distortions. In addition, we also find that reductions in the benefit level (i.e. privatization) will only reduce economic efficiency.

Keywords: stochastic OLG model, tax-benefit linkage, endogenous retirement, population ageing

JEL Classification: C68, H55, J11, J26

Suggested Citation

Fehr, Hans and Kallweit, Manuel and Kindermann, Fabian, Should Pensions Be Progressive? Yes, at Least in Germany! (February 1, 2011). Netspar Discussion Paper No. 02/2011-010, Available at SSRN: https://ssrn.com/abstract=1809699 or http://dx.doi.org/10.2139/ssrn.1809699

Hans Fehr (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
D-97070 Wuerzburg
Germany
0931- 31 29 72 (Phone)
0931- 888 71 29 (Fax)

Manuel Kallweit

affiliation not provided to SSRN ( email )

Fabian Kindermann

University of Regensburg ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
125
Abstract Views
2,207
Rank
262,197
PlumX Metrics