Rates of Return of the German Pay-as-You-Go Pension System

In: FinanzArchiv, Jg. 55 (1998), S. 374-399
ISSN: 00152218
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
Due to population aging, contribution rates of the mandatory German pay-as-you-go pension system are expected to increase dramatically during the next decades. This paper estimates the impact on the expected returns of contributions for different cohorts. I show that rates of return for younger cohorts will be between zero and one percent, depending on the demographic and economic scenarios; for some demographic groups they become negative. The implicit tax rates reach levels of around two-thirds of contributions for the youngest cohorts. If decreasing returns reduce incentives for labor supply and system participation, the whole system may become unsustainable. Indeed, I find empirical evidence for a recent decline of voluntary contributions and for a substitution away from taxable employment.