From Basic Pension to Life Expectancy Factor

Abstract

Abstract German public pension policy has always been torn between popular service expansions and the need for fiscal consolidation. Based on the methodology of generational accounting, this work determines long-term fiscal effects of two exemplary expansive measures and introduces a measure aiming towards increased fiscal sustainability. The two measures consist of the recently introduced distortionary early retirement scheme at age 63 as well as the introduction of the supplementary basic pension scheme. Both measures increase the sustainability gap by 10% of GDP and will oppose the fundamental principles of the German social policy system. The authors introduce a dynamic life expectancy factor for automatic adjustment of the statutory retirement which could potentially reduce the pension system’s sustainability gap by half of the initial magnitude.