The Golden Years of Social Security -- Life-cycle Income, Pensions and Savings in Germany

Reinhold Schnabel

No 99-40, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This paper estimates the life-cycle income of West-German households. The empirical analysis is based on the Income and Expenditure Surveys from 1978 to 1993 (EVS), and on social security data. While cross-section estimates suggest a marked decline of household incomes starting at age 45 of the head of the household, the longitudinal analysis reveals that this is due to a combination of cohort and macro effects. The latter being due to the second oil shock. A moderate reduction of household income beyond age 50 reflects changes in household composition. For older cohorts, the transition to retirement reduces household income by around 20 percent compared to earnings before retirement. Contrary to conventional wisdom, retirement is not a time of scarce resources for current generations of pensioners. In fact, retirement income is far above the average income during working life. This is even more true for per capita income, which determines individual consumption possibilities. As it turns out ex post, households did consume far to less during their working life ¹ resulting in excessive median wealth holdings at the beginning of retirement. Presumably, the dramatic increases in wages and public pensions have not been anticipated. After retirement, consumption remains low and the median pensioners in our sample period 1978-1993 not only display high disposable incomes, but also high inter vivos transfers and positive savings. However, this situation will change during the next decades, since growth rates have declined and the dependency ratio is deteriorating rapidly.

Pages: 20 pages
Date: 1999-02-28
Note: I wish to thank Axel Börsch-Supan, Isabel Gödde, and seminar participants at the University of Mannheim for helpful comments on an earlier version of this paper. Research in this paper was supported by the Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 504 at the University of Mannheim.
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