Project in detail

Pension Benefits Adjustment in Germany – What can be considered the Best Pension Adjustment Formula?

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Due to its complexity and incomprehensibility, the mechanism for the annual pension adjustment has experienced rising criticism. The objective of this project is to evaluate the actual formula as well as alternative adjustment proposals on the basis of different criteria. Furthermore, the consequences of the different adjustment formulas for the statutory pension insurance are analyzed applying a pension simulation model. Primarily, the simulation provides a comparison between the current legal rule and the potential alternative formulas. It becomes evident that the current formula is better than its reputation suggests. However, a salary indexed adjustment formula extended to include a sustainability factor presents a valid alternative. Such a formula is coherent and predictable as it guarantees pensioners’ participation in the technological progress, balances the opposing goals of stable contribution and replacement rates, limits intergenerational inequality and leads to a self-stabilizing pension system. Adjustment formulas that are indexed to the wage bill or the inflation rate turn out to be less appropriate because they do not adequately account for future demographic changes. This project has been published as „Dynamisierung der Rente: Was ist die beste Rentenanpassungsformel?”, Zeitschrift für Wirtschaftspolitik in the year 2012.

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