Profitability of Pension Contributions: Evidence from Real-Life Employment Biographies

Carsten Schröder

No 1057, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Micro-econometric intra-cohort profitability analyses of pay-as-you-go (PAYG) pension contributions are rare. We use representative employment histories of a birth cohort of German PAYG pension insurants retiring in year 2005 to econometrically examine the determinants of the profitability of such contributions using nominal internal rates of return (IRR) as profitability measure. When future nominal pension entitlements are frozen at today's level, average IRR is slightly above three percent. At the same time, IRR differs substantially across beneficiaries. IRR is increasing in beneficiaries' remaining life expectancies at retirement and in the length of non-contribution periods resulting, for example, from child care or care for an ill partner. Due to survivor pensions, married insurants benefit from higher IRR as compared to the non-married. Interestingly, IRR is decreasing in insurants' earnings capacity, indicating that the system entails an intra-cohort progressive element.

Keywords: Pay-as-you-go; pensions; rate of return; redistribution; employment biography (search for similar items in EconPapers)
JEL-codes: D14 D2 D39 D91 H55 (search for similar items in EconPapers)
Pages: 23 , Anh. p.
Date: 2010
New Economics Papers: this item is included in nep-age and nep-lab
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Journal Article: Profitability of pension contributions – evidence from real-life employment biographies* (2012)
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