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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: To counteract aging populations, statutory pay-as-you-go pension systems are subject to fundamental reforms in many Western societies. Starting with cohort 1937, Germany introduced permanent pension deductions for early retirement. This paper examines the evolution of the profitability of pension contributions against the background of this reform for cohorts [1935][1936][1937][1938][1939][1940][1941][1942][1943][1944][1945]. I measure the profitability with the internal rate of return (IRR) and use high quality administrative data. For men the IRR declines from 2.4% to 1.19% and for women from 5.15% to 3.72%. The results suggest that the deductions introduced by the reform only cause some part of this trend, with a major part caused by increases in contributions. Terms of use: Documents in EconStor mayJEL CODES: D02, D04, D14, D91, H55

Effectiveness of early retirement disincentives: Individual welfare, distributional and fiscal implications

“…The individuals considered are able to claim the normal old-age pension at age 65 or the pension for long-term insured after age 2 Appendix A1 provides an overview on key institutional figures. For further details on the calculation of pensions in Germany see Lüthen (2015).…”

“…of early retirement, which were actually introduced through a major pension reform in Germany in 1992 (Hanel, 2010;Lüthen, 2015). We analyze to what extent disincentives are able to steer retirement behavior and provide evidence on distributional, individual welfare and fiscal implications of reducing pensions for early retirees.…”

“…These "waiting periods" consist of periods of contributions, wage replacement benefits (unemployment, sick-pay, invalidity), child-raising and times of education. A detailed overview on eligibility and pension types is provided in Lüthen (2015). 4 See Lüthen (2015) for further details.…”

“…A detailed overview on eligibility and pension types is provided in Lüthen (2015). 4 See Lüthen (2015) for further details. The reform also introduces a pension bonus of 0.5 % per month retiring after 65, but this affects only a negligible amount of individuals.…”

The rising longevity gap by lifetime earnings – Distributional implications for the pension system

“…Since the pathways differ in normal and early retirement age, maximal deductions vary between 7.2% and 18%. For a detailed description of the rules and descriptive evidence about the pension contributions and pension entitlements of early retirees, seeLüthen (2016).…”