Seniority-Based Wage System and Postponed Retirement

Abstract

Demographic ageing is often measured by age dependency ratios i.e. the number of individuals 60 years or more old in relation to those individuals between 20 and 60 years old. An official projection for the Federal Republic of Germany predicts that the age dependency ratio will increase from 38.5 % in 1985 to 81.2 % in 2030. This challanges the existing retirement system. Assuming for instance a pay-as-you-go method of financing an earnings-related pension system, a doubling of the retirees ratio would also require a doubling of the contribution rate (leaving the benefit level unaltered). For the Federal Republic of Germany this would mean an increase of the contribution rate from 18.5 % to 37 %, shared in equal parts by employers and employees. Schmähl (1987) has discussed as measures to avoid this an increase of the labour-force participation rate and the prolongation of the employment phase. An increase of the labour-force participation rate would temporarily lower the pension burden, but also raise it later, while “in times of high employment — and only then it is a realistic option — an average one-year prolongation of the employment phase would reduce, for example, in the Federal Republic of Germany, the otherwise necessary contribution rate by 3 percentage points — through an increase in the number of contributors and a decrease in the number of pensioneers” (Schmähl (1987), p. 28).