Germany: A social security system on the verge of collaps

Axel Börsch-Supan (boersch-supan@mea.uni-mannheim.de)
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Axel Börsch-Supan: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 97-23, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Germany has one of the most generous retirement systems in the world. At the very same time, Germany also faces one of the most incisive population aging processes. The ratio of workers to pensioners will decrease to about one to one within the next generation. This will put the German pay-as-you-go social security system under sever pressure. This paper has three aims. First, it shows that the design of the current system has incentive effects which make coping with the future demographic challenges particularly difficult. Second, it shows that the German pay-as-you-go mechanism cannot be fixed by any single policy measure alone. Moreover, while a combination of several feasible measures may be able to stabilize the contribution rate, the internal rate of return of the pay-as-you-go system will fall to a level that is likely to create strong incentives to opt out wherever possible. Third, the paper shows that a transition to a funded system is feasible without creating a double burden on the transition generation.

Pages: 46 pages
Date: 1997-07-20
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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