How much is transfer and how much insurance in a pay-as-you-go system? The German Case

Axel Börsch-Supan () and Anette Reil-Held ()
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Axel Börsch-Supan: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim
Anette Reil-Held: Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504, Postal: L 13,15 D-68131 Mannheim

No 00-26, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Pay-as-you go pension systems are an insurance against the risks of longevity-related old-age poverty and related risks. In addition, they are commonly also used as an instrument of redistribution. This paper provides alternative estimates of the transfer share in the German PAYG public pension system. Estimating this share is important in at least two respects. First, a transfer share may increase taxation-related dead weight losses and decrease public acceptance of the pension system. Second, the transfer share is an important parameter in assessing whether a pareto-efficient transition to a funded pension system is possible. The paper also attempts to disentangle intragenerational from intergenerational redistribution. It shows that, although intragenerational transfers are smaller than official estimates, the resulting still creates substantial dead weight losses opening some latitude for pareto-improvements. The intergenerational redistribution is much larger than the intragenerational redistribution. This creates negative participation incentives for the younger generation, and there is evidence that these disincentives are indeed strong.

Pages: 33 pages
Date: 2000-05-29
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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