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Pension reform and demographic uncertainty: the case of Germany

Published online by Cambridge University Press:  08 February 2006

HANS FEHR  and
CHRISTIAN HABERMANN
HANS FEHR
Affiliation:
Department of Economics, University of Wuerzburg, Sanderring 2, D-97070 Wuerzburg, Germany. Fax: ++49-931-888-7129 (e-mail: hans.fehr@mail.uni-wuerzburg.de)
CHRISTIAN HABERMANN
Affiliation:
Department of Economics, University of Wuerzburg, Sanderring 2, D-97070 Wuerzburg, Germany. Fax: ++49-931-888-7129 (e-mail: hans.fehr@mail.uni-wuerzburg.de)
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Abstract

The present paper compares the distributional and risk-sharing consequences of two pension reform options in Germany, which both aim to improve the sustainability of the current system by introducing demographic variables to the benefit calculation. While the first reform proposes a so-called ‘sustainability factor’, which measures the changes in the dependency ratio, the second reform proposes a so-called ‘demographic factor’, which takes into account the changes in life expectancy. Our simulations indicate that both reforms imply a double burden for currently middle-aged generations and a double relief for future living generations. On the one side, resources are redistributed from currently towards future living generations. In addition, part of the risk from demographic uncertainty is shifted from future living towards currently living middle-aged generations. The reforms differ, however, with respect to the magnitude of the resource distribution and risk implications. Therefore, future generations are much better off with the ‘sustainability factor’, while it is not clear whether middle-aged generations are better off with the ‘demographic factor’ or the ‘sustainability factor’.

Type
Research Article
Information
Journal of Pension Economics & Finance , Volume 5 , Issue 1 , March 2006 , pp. 69 - 90
Copyright
2006 Cambridge University Press

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Footnotes

We would like to thank the seminar participants at the Annual Meeting of the Verein für Socialpolitik as well as an anonymous referee and the editor Steven Haberman for helpful comments, Eckart Bomsdorf for providing mortality projections, Bernd Raffelhüschen for providing age profiles for health care, long-term care and education outlays and Susanne Schmid (Federal Statistical Office) for providing population data. Financial support from the European Commission's research project ‘Demographic uncertainty and the sustainability of social welfare systems’ (QLK6-CT-2002-02500) is also gratefully acknowledged.