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This may not always be precisely the case in legal or financial terms. Yet if premiums are adjusted annually because the experiences of the previous year have shown an increase in insured risks, this amounts over the longer term to a pay-as-you-go system.
Cf. Robert G. Merton, “On the Role of Social Security as a Means for Efficient Risk Sharing in an Economy where Human Capital is Not Tradable’, in: Zvi Bodie and John B. Shoven (eds),Financial Aspects of the U.S. Pension System, Chicago 1983, pp. 325–358. Zvi Bodie, Pensions as an Retirement Income Insurance,Journal of Economic Literature, vol. 28, 1990, pp. 28–49.
Different calculations have generated different results. See the full version of this report available in German: Wagner et al., ‘Kapitaldeckung—Kein Wundermittel für die Altersvorsorge’,Wochenbericht des DIW, no. 46/1998, Berlin.
Economists—such as the Advisory Council to the German ministry of economic affairs—who consider the fully funded model to be superior for fundamental reasons argue that the return on capital is certain to be higher than wage growth because, among other reasons, certain capital goods, in particular real estate, are non-reproducible. It remains a moot point, however, whether this better yield performance will in fact be maintained over the longer term.
The profit motive underlying private insurance funds is not a disadvantage. In perfectly competitive markets all that is earned is a reward for entrepreneurial activity, which would also accrue in the form of payment for labour services in non-profit organisations, while in the shor run‘pioneer profits’ constitute an incentive to investment.
The question of a ‘risk transfer’ from the insured to the insurance companies, whose profits would narrow accordingly, in order to finance unplanned benefits, is not considered here. Under German law insurance companies are permitted to pass on the costs arising out of unforeseeable risks to the insured, rather than covering them out of the companies’ profits.
32 companies responded, of which 29 could be evaluated for the question under consideration here. A response rate of around 40% is very satisfactory for a mail survey.
Even if the extreme assumption is made that all the insurance companies that did not respond financed pensions exclusively on an individual contractual basis, around 30% used redistributive elements.
Cf. John H. Cochran, ‘Time-Consistent Health Insurance’,Journal of Political Economy, 1995, pp. 445–473, especially p. 467.
Cf. Larry Kotlikoff, ‘Privatisation of Social Security-How it Works and Why it Matters’,NBER Working Paper no. 5330, Cambridge, Mass, 1995.
It is for this reason that private health insurers in Germany reject a fully funded system.
To be more precise, it is not the number in employment, but the total income on which basis contributions are paid that is decisive.
Whereas until now public choice models have suggested that, as the population ages, the older generation, which constitutes an electoral majority, ‘exploits’ the younger generation, newer models based on the assumption of an endogenous labour supply show, that a compromise between interests will be reached, as observed in reality. See Kai A. Konrad, ‘Fiscal federalism and intergenerational redistribution’,Finanzarchiv, 1995, issue 2, pp. 166–181.
See also ‘Are funded pensions better than a pay-as-you-go system?—A critical view on Kazakstan’s Pension Reform’,Kazakstan Economic Trends, October–December, Berlin 1997, pp. 33–52.
This burden cannot be avoided merely by not paying a proportion of wages directly to employees, but rather, on the basis of a collective agreement, into a pension fund. Such collective provisions face the same problems relating to the volume of savings as a share of income that are discussed below.
Cf. Friedrich Breyer, ‘On the intergenerational Pareto efficiency of pay-as-you-go financed pension systems’,Journal of Institutional and Theoretical Economics, 1989, vol. 145, pp. 643–658.
Particularly because the distributional policy goals that have led to deviations from the equivalence principle, would continue to apply on transition to a funded system, i.e. that an excess burden would also arise in a fully funded system.
A poll tax that would avoid this problem could not be acceptable for reasons of distributional equity. Cf. Robert Fenge, ‘Pareto efficiency of the pay-as-you-go pension systems with intragenerational fairness’,Finanzarchiv, N.F., vol. 52(3), 1995, pp. 357–363.
See, for example, Axel Börsch-Supan, ‘Germany: A social security system on the verge of collapse’, in H. Siebert (ed.),Redesigning social Security, Tübingen 1998, pp. 129–159. Along with the Scientific Advisory Council to the German Ministry of Economic Affairs the author considers a significant double burden on those contribution payers who also have to finance their own funded pension to be acceptable. Hans-Werner Sinn has argued that the burden of a transition to a partially funded system should be placed explicitly on the childless or those belonging to a generation that has raised too few children, as they are in a better economic position under the contribution-based system than those raising children. (Hans-Werner Sinn, ‘A general comment on the old age pension problem—A funded system for those who caused the crisis’, in the same volume edited by Siebert).
It has proposed a supplementary compulsory funded insurance scheme amounting to an additional four percentage points of the income on which social insurance contributions are due. This would lead to a further increase in indirect labour costs, which are already widely seen as excessive.
See, for example, the contribution by Axel Börsch-Supan cited earlier.
According to survey evidence (German Socio-economic Panel), including the rental value of owner occupied housing of the elderly.
In Germany it is the case that company pension schemes receive, to all intents and purposes, a government grant, just as does the statutory pension fund.
In this case the employer pays the premiums for a private life or pension insurance scheme.
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Wagner, G.G., Kirner, E., Leinert, J. et al. Fully funded insurance: No panacea for social security for the elderly. Economic Bulletin 36, 37–44 (1999). https://doi.org/10.1007/BF02684055
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DOI: https://doi.org/10.1007/BF02684055