Accounting of the German Statutory Pension Scheme: Balance Sheet, Cross‐Sectional Internal Rate of Return and Implicit Tax Rate

Abstract

We present a framework for accounting of the German statutory pension scheme and calculate a balance sheet for the period 2005–14. Estimating a funding ratio of about 90 per cent, we present some policy recommendations in order to restore balancing of assets and liabilities. Extending and applying the methodology proposed by Settergren and Mikula (2005), we additionally estimate the aggregate cross‐sectional internal rate of return of the German pension scheme over this period. We are able to show that these internal rates of return are mainly financed by increasing contributions and by increasing unfunded liabilities. Additionally, our analysis reveals that from an expenditure perspective, the major part of the internal rate of return results from changing longevity rather than other changes. We also estimate the implicit tax rates from a cross‐sectional perspective and find that they can mainly be interpreted as an ‘implicit wealth tax’ on pension wealth. Finally, we analyse the impact of demographic change on the balance sheet employing a population projection. While the pure demographic effect leads to a decreasing funding ratio during population ageing, the automatic balancing mechanisms of the German pension scheme lead to a significant overfunding in the long run from the accounting perspective adopted in the Swedish pension system.

Indicators for Measuring Intergenerational Fairness of Social Security Systems—The Case of the German Social Health Insurance

“…The closed group without future accruals approach constitutes the starting point for applications of the work of Settergren and Mikula [6] because only pension entitlements of pensioners and contributors accrued to date are considered. Examples are the automatic balance mechanism of the Swedish pension system [7] as well as applications of the Settergren and Mikula [6] approach to the case of the defined benefit pension schemes in Spain, Germany, and Switzerland [8][9][10][11]. In contrast to the cited examples, which assess the liabilities of a pension scheme using the so-called "retrospective method", our application of the SM concept assesses the liabilities of the German SHI by computing the present value of future benefits and contribution payments, which Vidal-Meliá and Boado-Penas [30] call the "the prospective method".…”

“…In contrast to the cited examples, which assess the liabilities of a pension scheme using the so-called "retrospective method", our application of the SM concept assesses the liabilities of the German SHI by computing the present value of future benefits and contribution payments, which Vidal-Meliá and Boado-Penas [30] call the "the prospective method". However, as pointed out by Ventura and Vidal-Meliá [31] and others [10,11,32], by taking the contribution asset into account, the Settergren and Mikula [6] approach is basically equivalent to an open group approach.…”

“…In this paper, we consider an alternative measure of intergenerational fairness, derived from Settergren and Mikula [6], which provides the theoretical foundation of the automatic balance mechanism in the Swedish pension scheme [7] and compares it with two generational accounting approaches. Most applications of the Settergren and Mikula [6] approach are concerned with the fiscal sustainability of public pension systems (e.g., [8][9][10][11]). So far, it has rarely been applied to other social security systems.…”

From ‘Table 29’ to the Actuarial Balance Sheet: Is It Really That Big a Leap?

“…The SOG is based on the CG method but modified to make it equivalent to OG. It can be considered "open group" in any particular year because, in order to value the system's assets and liabilities, it takes new entrants into account and assumes that there will be contributions to meet liabilities, although the valuation formulas consider pensioners and contributors only at the valuation date (Ventura and Vidal-Meliá, 2014;Vidal-Meliá et al, 2018;Metzger, 2019;Garvey et al, 2020).…”

Does the pension system’s income statement really matter? A proposal for an NDC scheme with disability and minimum pension benefits

“…From an applied perspective, the annual reports of the Swedish pension system are the main references. Likewise, some researchers have used the (actuarial) balance sheet (ABS) approach and applied it to various countries including Japan (Takayama, 2005), Spain (Boado-Penas et al, 2008;Vidal-Meli a et al, 2009; Vidal-Meli a, 2014), Canada (Billig & M enard, 2013), Switzerland (Metzger, 2018), Germany (Metzger, 2019) and Belgium (Alonso-Garc ıa & Devolder, 2019).…”