On the Fairness of Early-Retirement Provisions

Abstract

Declining fertility and increasing longevity have rendered public pension systems in many OECD countries unsustainable and have triggered substantial reforms of these systems. One of the officially declared reform objectives is to raise the average retirement age. Crucial parameters for this endeavor are first the legal retirement age and secondly the early retirement provisions inherent in the public pension system. In this paper we discuss several notions of "fairness" of early retirement provisions in pay-as-you-go financed public pension systems and we claim that the "right" notion of fairness depends upon the objectives pursued in the design of pension systems. We point out the problems attached to the extreme positions "efficiency" and "welfare maximization" and propose a more modest concept of equity called "distributive neutrality", which is based on the notion that the ratio between total benefits and total contributions to the pension system should not depend systematically on the individual's ability. By applying this concept to the German retirement benefit formula and taking empirically estimated relationships between average annual income, life expectancy and retirement age into account, we show that at the present discount rate of 3.6 per cent per year there is systematic redistribution from low to high earners, which would be attenuated if the discount rate were raised. This seemingly paradoxical finding is due to the fact that in our data set, there is a negative relationship between earnings and retirement age. JEL Code: H55.

Fairness of Public Pensions and Old-Age Poverty

“…In an earlier paper (Breyer and Hupfeld 2009) we have questioned this view and proposed a new concept of distributive neutrality that takes incomegroup-specific differences in life expectancy into account and focuses on expected total rather than monthly or annual benefit claims. In the present paper, we have derived a new formula for calculating retirement benefits that takes account of differences in expected length of the retirement period and thus achieves distributive neutrality.…”

“…1 But is this really the case? As has been shown by Breyer and Hupfeld (2009), the value of a contributed euro is not always the same, but depends on the life expectancy of the individual, and there is now a wealth of evidence from many countries that life expectancy is positively correlated with annual income. 2,3 In that earlier paper, we introduced the concept of distributive neutrality, which is actually a generalization of the well-known concept of Teilhabeäquivalenz (tax-benefit proportionality) and takes income-group-specific differences in life expectancy into account.…”

Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform

“…Deductions did not exist pre-reform. Still, there is evidence that the deductions are not 'fair' and should be higher (Breyer and Hupfeld, 2010).…”

Maßnahmen zur Vermeidung von Altersarmut: Makroökonomische Folgen und Verteilungseffekte

“…Gemäß Breyer und Hupfeld (, ) sollte aber vielmehr die gesamte (erwartete) Rentenleistung in einem festen Verhältnis zum gesamten Einkommen oder zur gesamten Beitragsleistung der Erwerbsphase stehen. Die gesamte (erwartete) Rentenleistung hängt nun nicht nur von der monatlichen Rentenhöhe, sondern auch von der erwarteten Rentenbezugsdauer ab.…”

“…Um diesen Aspekten Rechnung zu tragen, plädieren Breyer und Hupfeld () für eine neue Rentenberechnungsformel. Nach dieser wäre der monatliche Rentenanspruch nach wie vor proportional zu den Versicherungsjahren, würde aber mit dem im Durchschnitt der Erwerbsjahre erzielten Einkommen nur degressiv zunehmen, sodass nach Auffassung von Breyer und Hupfeld () zudem Verteilungsneutralität erreicht würde. Auf diese Weise würden sich im Vergleich zur aktuellen Rechtslage die Rentenzahlungen von Beziehern niedriger Erwerbseinkommen erhöhen, sodass dieser Vorschlag dazu geeignet ist, einer potenziell steigenden Altersarmut entgegenzuwirken.…”