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

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  • Holger Lüthen
Abstract
To counteract the financial pressure emerging in aging societies, statutory pay‐as‐you‐go pension schemes are undergoing fundamental reforms in many Western countries. 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 1935‐1945. 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 1.2% and for women from 5.2% to 3.7%. The results suggest that the deductions introduced by the reform only cause some part of this trend. The majority of the trend, about 75%‐80%, is caused by increased pension contributions.

Suggested Citation

  • Holger Lüthen, 2014. "Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform," Discussion Papers of DIW Berlin 1389, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1389
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    Cited by:

    1. Haan, Peter & Kemptner, Daniel & Lüthen, Holger, 2020. "The rising longevity gap by lifetime earnings – Distributional implications for the pension system," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    2. Holger Lüthen, 2014. "Rente und Reform: Lehren aus der Vergangenheit," DIW Roundup: Politik im Fokus 14, DIW Berlin, German Institute for Economic Research.
    3. Bönke, Timm & Kemptner, Daniel & Lüthen, Holger, 2018. "Effectiveness of early retirement disincentives: Individual welfare, distributional and fiscal implications," Labour Economics, Elsevier, vol. 51(C), pages 25-37.
    4. Regina T. Riphahn & Frederik Wiynck, 2017. "Fertility effects of child benefits," Journal of Population Economics, Springer;European Society for Population Economics, vol. 30(4), pages 1135-1184, October.
    5. Kemptner, Daniel & Haan, Peter & Lüthen, Holger, 2017. "The increasing longevity gap by lifetime earnings and its distributional implications," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168278, Verein für Socialpolitik / German Economic Association.
    6. Gentiana Sharku, 2017. "Profitability on Albanian Supplementary Social Insurance Scheme: "Academic Titles" Case," International Business Research, Canadian Center of Science and Education, vol. 10(3), pages 215-220, March.
    7. Schröder Carsten & König Johannes & Fedorets Alexandra & Goebel Jan & Grabka Markus M. & Lüthen Holger & Metzing Maria & Schikora Felicitas & Liebig Stefan, 2020. "The economic research potentials of the German Socio-Economic Panel study," German Economic Review, De Gruyter, vol. 21(3), pages 335-371, September.
    8. Lüthen Holger & Schröder Carsten & Grabka Markus M. & Goebel Jan & Mika Tatjana & Brüggmann Daniel & Ellert Sebastian & Penz Hannah, 2022. "SOEP-RV: Linking German Socio-Economic Panel Data to Pension Records," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 242(2), pages 291-307, April.
    9. Ulrike Famira-Mühlberger & Ulrike Huemer & Christine Mayrhuber, 2015. "Der Einfluss der sozialen Sicherungssysteme auf die Beschäftigungsquote Älterer in traditionellen Wohlfahrtsstaaten," WIFO Working Papers 499, WIFO.

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    More about this item

    Keywords

    Pensions; reform; early retirement; disincentives; pay‐as‐you‐go; rates of return; Germany;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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