Pension Reform, Capital Markets and the Rate of Return

Börsch-Supan Axel, Alexander Ludwig, Heiss Florian and Winter Joachim
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Börsch-Supan Axel: University of Mannheim and NBER, Cambridge, MA,Mannheim, Germany
Heiss Florian: University of Mannheim,Mannheim, Germany
Winter Joachim: University of Mannheim,Mannheim, Germany

German Economic Review, 2003, vol. 4, issue 2, 151-181

Abstract: This paper discusses the consequences of population aging and a fundamental pension reform - that is, a shift towards more pre-funding - for capital markets in Germany. We use a stylized closed-economy, overlapping-generations model to compare the effects of the recent German pension reform with those of a more decisive reform that would freeze the current pay-as-you-go contribution rate and thus result in a larger funded component of the pension system.We predict rates of return to capital under both reform scenarios over a long horizon, taking demographic projections as given. Our main finding is that the future decrease in the rate of return is much smaller than often claimed in the public debate. Our simulations show that the capital stock will decrease once the baby-boom generations enter retirement, even if there were no fundamental pension reform. The corresponding decrease in the rate of return, the direct effect of population aging, is around 0.7 percentage points. While the capital market effects of the recent German pension reform are marginal, the rate of return to capital would decrease by an additional 0.5 percentage points under the more decisive reform proposal.

Keywords: Aging; pension reform; rates of return (search for similar items in EconPapers)
Date: 2003
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Journal Article: Pension Reform, Capital Markets and the Rate of Return (2003)
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DOI: 10.1111/1468-0475.00077

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