Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-25T08:40:30.009Z Has data issue: false hasContentIssue false
  • English
  • Français

Profitability of pension contributions – evidence from real-life employment biographies*

Published online by Cambridge University Press:  16 June 2011

CARSTEN SCHRÖDER
CARSTEN SCHRÖDER
Affiliation:
Christian-Albrechts University of Kiel and DIW Berlin (e-mail: carsten.schroeder@economics.uni-kiel.de)
Get access Rights & Permissions [Opens in a new window]

Abstract

Micro-econometric intra-cohort profitability analyses of pay-as-you-go (PAYG) pension contributions are rare. We use representative employment histories of German PAYG pension insurants retiring in year 2005 to examine the determinants of the profitability of contributions using nominal internal rates of return (IRR) as measure. When future nominal pension entitlements are frozen at today's level, average IRR is about three percent. It increases in beneficiaries' remaining life expectancies at retirement and in the length of non-contribution periods resulting, for example, from child care. Interestingly, IRR is decreasing in insurants' earnings capacity, indicating that the system entails an intra-cohort progressive element.

Keywords

D02D14D39D91H55Pay-as-you-gopensionsrate of returnredistributionemployment biography
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 11 , Issue 3 , July 2012 , pp. 311 - 336
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Auerbach, A. and Kotlikoff, L. (1987) Dynamic Fiscal Policy. Cambridge, UK: Cambridge University Press.Google Scholar
Börsch-Supan, A. (2000) Incentive effects of social security on labour force participation: evidence in Germany and across Europe. Journal of Public Economics, 78: 25–49.CrossRefGoogle Scholar
Bosworth, B., Burtless, G. and Steuerle, E. (1999) Lifetime Earnings Patterns, the Distribution of Future Social Security Benefits, and the Impact of Pension Reform. Working Paper, 6, Center for Retirement Research, Boston College.CrossRefGoogle Scholar
Burkhauser, R.V. and Warlick, J. (1981) Disentangling the annuity from the redistributive aspect of social security. Review of Income and Wealth, 27: 401–421.CrossRefGoogle Scholar
Cigno, A., Luporini, A. and Pettini, A. (2003) Transfers to families with children as a principal-agent problem. Journal of Public Economics, 87: 1165–1172.CrossRefGoogle Scholar
Cubeddu, L. (2000) Intragenerational redistribution in unfunded pension systems. IMF Staff Papers, 47: 90–115.CrossRefGoogle Scholar
DIA – Deutsches Institut für Altersvorsorge (2010) Inflation rates. Available online at http://www.dia-vorsorge.de/downloads/df010111.pdfGoogle Scholar
Duggan, J. E., Gillingham, R. and Greenlees, J. S. (1993) Returns paid to early social security cohorts. Contemporary Policy Issues, 11: 1–13.CrossRefGoogle Scholar
Feldstein, M. (1990) Imperfect annuity markets, unintended bequests, and the optimal age structure of social security benefits. Journal of Public Economics, 41: 31–43.CrossRefGoogle Scholar
Fullerton, D. and Rogers, D. (1993) Who Bears the Life Time Income Tax. Washington, DC: Brookings Institution.Google Scholar
German Central Bank (2010) Returns on Federal Treasury notes. Available online at http://www.bundesbank.de/download/kredit/kredit_ausstattung_bsb.pdfGoogle Scholar
German Federal Statistical Office (2009) Various statistical resources. Available online at http://www.destatis.deGoogle Scholar
German Federal Statistical Office (ed.) (2007) Mortality Statistics. Available online at http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Statistiken/Bevoelkerung/Geburten/Sterbefaelle/Tabellen/Content100/SterbetafelDeutschland,property=file.xls (accessed 15 May 2008).Google Scholar
German Pension Insurance (ed.) (2007) Codeplan FDZ-Biografiedatensatz – VVL 2005. Available online at http://forschung.deutsche-rentenversicherung.de/\discretionary-ForschPortalWeb/ressource?key=fdz_svvl05 (accessed 2 July 2008).Google Scholar
German Public Pension Insurance (ed.) (2009) Rentenversicherung in Zeitreihen, p. 22.Google Scholar
Gordon, R. and Varian, H. (1988) Intergenerational risk sharing. Journal of Public Economics, 37: 185–202.CrossRefGoogle Scholar
Gruber, J. (1997) The incidence of payroll taxation: evidence from chile. Journal of Labor Economics, 15: 72–101.CrossRefGoogle Scholar
Gustman, A. L. and Steinmeier, T. L. (2001) How effective is redistribution under the social security benefit formula? Journal of Public Economics, 82: 1–28.CrossRefGoogle Scholar
Hurd, M. D. and Shoven, J. B. (1985) The Distributional Impact of Social Security. In Wise, D. (ed.), Pensions, Labor, and Individual Choice. Chicago: University of Chicago Press for NBER.Google Scholar
Imrohoroglu, A., Imrohoroglu, S. and Joines, D. (1995) A life cycle analysis of social security. Economic Theory, 6: 83–114.CrossRefGoogle Scholar
Knell, M. (2010) How automatic adjustment factors affect the internal rate of return on PAYG pension systems. Journal of Pension Economics and Finance, 9(1): 1–23.CrossRefGoogle Scholar
Liebman, J. B. (2001) Redistribution in the current U.S. Social Security System. NBER Working Paper Series, 8625.Google Scholar
Lindbeck, A. and Weibull, J. (1988) Altruism and time consistency: the economics of fait accompli. Journal of Political Economy, 96: 1165–1181.CrossRefGoogle Scholar
Luciano, E., Spreeuw, J. and Vigna, E. (2008) Modelling stochastic mortality for dependent lives. Insurance: Mathematics and Economics, 43(2): 234–244.Google Scholar
Ohsmann, S. and Stolz, U. (2004) Entwicklung der Rendite in der gesetzlichen Rentenversicherung. Betrachtungen zur Rendite der aktuellen und künftigen Altersrenten. Die Deutsche Angestelltenversicherung, 4(2): 119–124.Google Scholar
Palacios, R. and Whitehouse, E. (1998) The Role of Choice in the Transition to a Funded Pension System. Washington, DC: World Bank Social Protection Division. Vol. 9812, pp. 1–30.Google Scholar
Pappas, G., Queen, S., Hadden, W. and Fisher, G. (1993) The increasing disparity in mortality between socioeconomic groups in the United States, 1960–1986. New England Journal of Medicine, 329: 103–109.CrossRefGoogle Scholar
Poterba, J. (2001) Demographic structure and asset returns. Review of Economics and Statistics, 83: 565–584.CrossRefGoogle Scholar
Rogot, E., Sorlie, P. D., Johnson, N. J. and Schmitt, C. (1992) A mortality study of 1.3 million persons by demographic, social, and economic factors: 1979–1984 follow-up. National Institutes of Health, NIH Publication No. 92-3297, ed. National Institutes of Health, PHS, DHHS, 1992.Google Scholar
Samuelson, P. (1958) An exact consumption-loan-model of interest with or without the social contrivance of money. Journal of Political Economy, 66(6): 219–234.CrossRefGoogle Scholar
Schnabel, R. (1998) Rates of return of the German pay-as-you-go pension system. Finanzarchiv, 55(3): 374–399.Google Scholar
Schnabel, R. and Ottnad, A. (2008) Gesetzliche und private Altersvorsorge – Risiko und Rendite im Vergleich. Köln: Deutsches Institut für Altersvorsorge.Google Scholar
Settergren, O. and Mikula, B. D. (2005) The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest. Journal of Pension Economics and Finance, 4: 115–138.CrossRefGoogle Scholar
Sinn, H.-W. (2004) The pay-as-you-go pension system as fertility insurance and an enforcement device. Journal of Public Economics, 88: 1335–1357.CrossRefGoogle Scholar
Smith, A. (1982) Intergenerational transfers as social insurance. Journal of Public Economics, 19: 97–106.CrossRefGoogle Scholar
Townley, P. C. G. and Boadway, R. (1988) Social security and the failure of annuity markets. Journal of Public Economics, 35: 75–96.CrossRefGoogle Scholar