Pension Policies for an Aging Society

Pension reform is one of the most pressing issues on the current and future agenda of policy and economic research. Georg Hirte develops and uses a uniform framework for analyzing the effects of pension reforms on redistribution and efficiency among the different generations and the political feasibility of these reforms. He discusses current policies in Germany in detail and also deals with many other proposals which have been made to overcome the problems that have developed within the pension system due to an aging population. These proposals include smoothing the contribution or implicit tax rate, raising the retirement age, switching to tax financing, the accumulation of a capital stock in the pension system and the transition to a partially or fully funded system. The quantitative analysis is based on the Auerbach-Kotlikoff model. The main changes in this framework are a completely endogenous decision on retirement, longer life expectancy, unemployment rates which depend on age, implicit tax rates, and the relationship between the pension system and health, long-term care and unemployment insurance. Georg Hirte's results suggest that the efficiency effects are considerable and that switching to financing pensions through taxation is the most promising reform with respect to welfare, efficiency, redistribution, and that this is also preferred by a majority of voters. He also shows that a transition to fully funded system or basic pensions are opposed by a majority of voters.