The Crisis of Germany's Pension Insurance System and How it Can Be Resolved

Abstract

The paper discusses the options for a reform of the German pension system using a model developed at CES for the German Council of economic advisors to the Federal Ministry of Economics and Research. It is argued that the German pay-as-you-go-system is efficient in a present value sense but will nevertheless need the support of a funded system to avoid a financial crisis. The paper recommends obligatory private savings at a variable rate where the time path of the savings rate is chosen so as to stabilize the sum of this rate and the pay-as-you-go contribution rate, given the time path of pensions as defined in the present system.

Keywords: Pension Insurance, Pay-as-you-go System, Savings, Germany

JEL Classification: H55