Project in detail

Replacement Rates in the Statutory Pension System in Germany

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A replacement rate aims to quantify the percentage of an individual’s income from employment that is replaced by his or her pension entitlements. The “classic replacement rate” measures the relation of pension payments to income from employment in the year before retirement. A frequently used figure is the replacement rate of a so called standard pensioner, a hypothetical person with a full insurance record that is 45 years of average contributions. However, this approach bears certain risks because in reality one is often faced with short and discontinuous earnings profiles. When looking at the official administrative data provided by the German pension authority regarding insurant that retired in the year 2010 it becomes evident that the “classic replacement rate” is prone to distortions and can only be calculated for just over half the sample due to a missing last salary before retirement. This paper presents an alternative measurement - the life cycle replacement rate - which relates individuals’ pension payments to the average real income over their whole working history. The analysis of the newly retired in 2010 shows that only insurant with a long continuous earnings history can match the replacement rate of the standard pensioner. Low replacement rates of regular old age pensioners can be explained by the group’s heterogeneity. Furthermore, non-contribution based pension entitlements (e.g. for periods of child raising) can significantly increase the replacement rate of low to medium income women. Additionally, work history related characteristics like marital status, income or retirement age have a strong influence on individuals’ replacement rates. This paper is forthcoming in the Journal of Economics and Statistics (Jahrbücher für Nationalökonomie und Statistik).

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