Seier A Micro-Perspective on Funding in the German Pension Reform of 2001

1. Auflage 2006
ISBN: 978-3-89936-419-4
Verlag: Josef Eul Verlag
Format: PDF
Kopierschutz: Adobe DRM (»Systemvoraussetzungen)

E-Book, Englisch, 191 Seiten

Reforming the social security system is one of the most pressing issues in Germany. In the face of declining birth rates and an aging population, the financing of the pension system in the current Pay-as-you-go system is on the verge of collapsing. In order to alleviate the problem of sustaining the PAYG pension system, the government decided to reduce future benefits from the PAYG pension system and support the funded second and third pillar of the pension system. Occupational and private pension savings are tax preferred and subsidized in order to provide additional pension benefits to close the gap due to lower PAYG benefits.

The funded system for old-age pension savings is a complex system of a wide variety of pension vehicles, tax incentives and subsidies. Participation and acceptance of the newly introduced "Riester-Pension" as well as the instruments of occupational pension does not fulfil expectations.

This dissertation analyses the results of the pension reform from a theoretical, institutional and individual point of view. Focus of the analysis is the regulatory framework, the incentive system, as well as the structure of occupational and private pensions in Germany.

Über die Autorin:

Andrea Seier, born 1974, has studied Economics at the University of Duisburg-Essen. During her studies she spent two semesters at the University of Birmingham where she was a member of the Master Course "Money, Banking and Finance". She received a grant from the "Studienstiftung des Deutschen Volkes". On completing her studies she worked as a doctoral student at the chair of public economics of Prof. Dr. Reinhold Schnabel at the University of Duisburg-Essen in Essen. In January 2005 she started working for The Boston Consulting Group GmbH in Düsseldorf where she is member of the insurance practice.

Autoren/Hrsg.

Seier, Andrea

Inhaltsverzeichnis

1;Widmung;6
2;Vorwort;8
3;Contents Overview;12
4;Contents;14
5;List of Figures;18
6;List of Tables;20
7;Introduction;22
8;Chapter 1: Funded and Un-funded Pension Systems: A Micro Perspective ;28
8.1;1.1 Introduction;28
8.2;1.2. The Literature;30
8.3;1.3 Funding versus PAYG;31
8.4;1.4. The Microeconomics of funded and un-funded pension systems;37
8.5;1.5. Uncertainty and solutions to the pension problem;46
8.6;1.6. Sensitivity analysis;61
8.7;1.7. Conclusion;64
9;Chapter 2: Are Minimum Return Guarantees really as Expensive? Regulation in the German Pension Reform of 2001 ;66
9.1;2.1. Introduction;66
9.2;2.2. Tax preferred pension plans and regulation;69
9.3;2.3. Investment strategies for minimum return guarantees;71
9.4;2.4. Analysis of historical returns, simulation and certainty equivalents;74
9.5;2.5. Individual analysis;77
9.6;2.6. Estimation and simulation;81
9.7;2.7. Conclusion;92
10;Chapter 3: Occupational Pensions after the German Pension Reform of 2001: An Institutional Approach ;94
10.1;3.1. Introduction;94
10.2;3.2. The reform;96
10.3;3.3. The vehicles of financing occupational pension schemes;99
10.4;3.4. Micro-effects of the pension reform on different types of employees;106
10.5;3.5. The quantitative advantage of the different occupational pension instruments;113
10.6;3.6. Risks associated with the respective type of pension scheme;123
10.7;3.7. Other factors of influence;124
10.8;3.8. Conclusion;127
11;Chapter 4: Old-Age Saving and the Pension Reform of 2001: Some Empirical Evidence on the lack of Popularity and the Role of Information ;130
11.1;4.1. Introduction;130
11.2;4.2. Old-age savings prior to the reform;133
11.3;4.3. Old-age Savings behavior after the pension reform;147
11.4;4.4. Conclusion;169
12;Final remarks;172
13;Appendix;174
14;References;180

Leseproben

Chapter 2: Are Minimum Return Guarantees really as Expensive? Regulation in the German Pension Reform of 2001 (p. 45-46)

2.1. Introduction

In order to cope with the problems of population aging, many governments in the OECD countries seek to reform their pension systems through a reduction of the fraction of pension benefits that are financed by the Pay-As-You-Go system. The most common reform measures are lowering replacement rates and raising the official retirement age. Lower replacement rates of the PAYG pension system can be stocked up through voluntary or compulsory contributions to funded pension plans that are usually tax-advantaged. The tax preferred pension plans are generally subject to regulations, which differ across OECD countries. Whereas Anglo-Saxon countries prefer "prudent person rules", many countries in continental Europe resort to extensive regulatory frameworks using quantitative rules.

Germany is an example of a country that faces a dramatic population aging and has a very large PAYG pension system. In the year 2003, public pensions amount to 13 percent of GDP. The PAYG pension benefits make up 80 to 85 percent of the retirement income of the average German household (see Börsch-Supan, Reil-Held, Schnabel 2001). The German pension Reform of 2001 will gradually reduce the net replacement rate of the public pension system from around 70 to 64 percent. Further reductions are inevitable given the severity of population aging. Parallel to the reduction of replacement rates, the reform of 2001 introduces a tax-preferred treatment of contributions to private pension plans. The German pension reform requires (among many other rules) a nominal capital guarantee for pension contributions, which is equivalent to a nominal zero percent return rule. The guarantee has to be met at the end of the accumulation phase. There are at least two motivations for this regulation. First, it is argued that uninformed consumers should be protected by a minimum return rule. Second, the downside risk of investment strategies is limited due to the welfare system which guarantees a minimum income at old age. This may encourage inefficiently risky investment strategies; a capital guarantee limits this moral hazard problem. In this chapter the costs of this capital guarantee in terms of final wealth levels and certainty equivalents for different degrees of risk aversion are assessed.

The costs of quantitative investment regulations have been the subject of much controversy in the literature (see Davis 2001a, 2001b). The requirement of a minimum return guarantee is one of the most widely discussed forms of regulating pension plans, especially in the light of recent reforms in Latin American countries which have switched to funded pension schemes (see Vittas 1998). The pension literature is divided regarding the benefit or harm associated with minimum return guarantees. For one, the issue of appropriate pricing of guarantees in terms of option pricing theory is controversial (see Fischer 1998). Moreover, if there are minimum guarantees and the portfolio choice is not restricted, the moral hazard problem might become very costly.

Smetters (2002) suggests guaranteeing a „standardized portfolio" and letting individuals carry the risk of choosing a non-standard portfolio. Furthermore, he proposes to tax portfolio returns in good states of the world and subsidize returns in bad states of the world. Jensen and Sorensen (2000) consider minimum return guarantees for pension plans in terms of an embedded put-option which the individual is forced to buy, thus, indirectly restricting the portfolio choice. They find that moderately risk averse investors suffer utility loss if forced to purchase such a guarantee.