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Profitability of Pension Contributions: Evidence from Real-Life Employment Biographies

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  • Carsten Schröder

Abstract

Micro-econometric intra-cohort profitability analyses of pay-as-you-go (PAYG) pension contributions are rare. We use representative employment histories of a birth cohort of German PAYG pension insurants retiring in year 2005 to econometrically examine the determinants of the profitability of such contributions using nominal internal rates of return (IRR) as profitability measure. When future nominal pension entitlements are frozen at today's level, average IRR is slightly above three percent. At the same time, IRR differs substantially across beneficiaries. IRR is increasing in beneficiaries' remaining life expectancies at retirement and in the length of non-contribution periods resulting, for example, from child care or care for an ill partner. Due to survivor pensions, married insurants benefit from higher IRR as compared to the non-married. Interestingly, IRR is decreasing in insurants' earnings capacity, indicating that the system entails an intra-cohort progressive element.

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  • Carsten Schröder, 2010. "Profitability of Pension Contributions: Evidence from Real-Life Employment Biographies," Discussion Papers of DIW Berlin 1057, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1057
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    Cited by:

    1. Haan, Peter & Kemptner, Daniel & Lüthen, Holger, 2020. "The rising longevity gap by lifetime earnings – Distributional implications for the pension system," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    2. Holger Lüthen, 2016. "Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform," German Economic Review, Verein für Socialpolitik, vol. 17(2), pages 206-233, May.

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    More about this item

    Keywords

    Pay-as-you-go; pensions; rate of return; redistribution; employment biography;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D39 - Microeconomics - - Distribution - - - Other
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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