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Macroeconomic consequences of raising social security contributions in Germany

Pavel Brendler ()
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Pavel Brendler: University of Bonn

No 214-2022, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Population aging imposes a challenge for the public pension systems in many developed countries. The solvency of the pension system requires a broad set of policy measures. The paper addresses the following question: What are the macroeconomic consequences of increasing the social security contribution rate in Germany? The question is answered theoretically by setting up a two-period partial equilibrium overlapping generations (OLG) model and analyzing the impact of a marginal increase in the contribution rate on the worker's optimal labor supply. The key finding is that the labor supply response crucially depends on the model assumptions regarding: 1) the relative magnitudes of the population growth rate and the real rate of return on private saving, 2) the individual's utility function; and 3) the labor income tax and the pension benefit function. In case of a linear labor income tax and earnings-dependent pensions, which approximate the current German pension system, the theory predicts a rise in employment in response to a payroll tax increase for a conventional specification of the utility function and a plausible parameterization of the model parameters.

Keywords: Population aging; Public pension program; Pension reform; Labor taxation (search for similar items in EconPapers)
JEL-codes: D3 E6 H2 H3 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2022
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