KDI 한국개발연구원

Over the past few years, the financial situation of the statutory pension system in Germany has been relatively free of tension. This was due to past reforms, a pause in demographic change, and positive developments on the labour market. The contribution rate decreased and several benefits were expanded. Demographic developments will be putting pension funding under pressure in future, however. Life expectancy is likely to go on rising and the large baby boomer cohorts will be entering retirement from the mid-2020s on wards. The German federal government is aiming for a long-term pension reform. Long-term projections are important for this ？ despite all the uncertainty involved. They highlight key developments and illustrate how reforms, from a current vantage point, are going to affect persons covered by the statutory pension system and taxpayers. They demonstrate how the key variables of the statutory pension system are correlated: replacement rate, contribution rate statutory retirement age, and federal government funds. This paper presents long term projections that are based on a general equilibrium model with overlapping generations (OLG) . It contains rational utility-maximising house- holds, profit-maximising firms and a government sector. A model framework of this na- ture captures both micro and macroeconomic relationships, meaning that households, for example, react to changes in the statutory pension system, such as the statutory retirement age or the replacement rate. Changes in households’ behaviour, in turn, impact on macroeconomic developments and public finances. The statutory pension system is thus integrated into a macroeconomic model. The simulation results clarify that it is not possible to capture the demographic bur- dens in a convincing manner using only a single parameter. The existing regulations distribute this pressure among the contribution rate and the replacement rate. One approach to reform would be to also consider the statutory retirement age and link (index) it systematically to increasing life expectancy. More specifically, the statutory retirement age could be raised so that the ratio of years in retirement and years of contributions remains broadly stable. Increasing life expectancy would then be tied to a longer period of employment, although the period of pension payment would also become longer. Assuming a moderate variant of the life expectancy projections, the statutory retirement age would have to rise to 69 years and 4 months by 2070. Any resulting increase in employment would also bolster social security contributions and taxes. Moreover, with a rising statutory retirement age and the associated longer periods of work, pension entitlements would increase. Taking increasing life expectancy into account when setting the statutory retirement age would additionally make it possible, in particular, to cope with the financial pressure caused by the lower birth rates since the 1970s. However, even with an indexed statutory retirement age, the contribution rate and federal government funds would rise relatively sharply up to around 2040 and the replacement rate would fall.