Holger Lüthen

Rates of Return and Early Retirement Disincentives: Evidence from a German Pension Reform

Abstract To counteract the financial pressure emerging in aging societies, statutory pension schemes are undergoing fundamental reforms in many Western countries. Starting with cohort 1937, Germany introduced permanent pension deductions for early retirement. This study examines the profitability of pension contributions against the background of this reform for cohorts 1935-1945. Internal rates of return (IRR) are used to measure the profitability. For men, the IRR declines from 2.4% to 1.2% and for women from 5.2% to 3.7%. The results suggest that the majority of the trend, about 75-80%, is caused by increased pension contributions and not by the reform.

The Dynamics of Earnings in Germany: Evidence from Social Security Records

This paper uncovers ongoing trends in idiosyncratic earnings volatility across generations by decomposing residual earnings auto-covariances into a permanent and a transitory component. We employ data on complete earnings life cycles for prime age men born 1935 through 1974 that covers earnings between 1960 and 2009. Over this period, the German labor market undergoes a heavy transformation and experiences strong deregulation, deunionization and a shift in employment from the industrial to the service sector. Our findings of increases in both components reflect the distinct phases of this transformation process. In magnitude, the transitory component increases most strongly in the early 1970s and the 1990s for young workers, whereas the permanent component displays the strongest increases for older workers in the early 1980 and the 2000s. Thus, the changes complicate the labor market entry for young workers while widening wage differences for established workers.

Effectiveness of Early Retirement Disincentives: Individual Welfare, Distributional and Fiscal Implications

In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that retirement behavior is strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are about three times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns, if achieved by indiscriminating pension cuts, are associated with individual welfare losses that are more than twice as high.

The rising longevity gap by lifetime earnings: Distributional implications for the pension system

This study uses German social security records to provide novel evidence about the heterogeneity in life expectancy by lifetime earnings and, additionally, documents the distributional implications of this earnings-related heterogeneity. We find a strong association between lifetime earnings and life expectancy at age 65 and show that the longevity gap is increasing across cohorts. For West German men born 1926-28, the longevity gap between top and bottom decile amounts to about 4 years (about 30%). This gap increases to 7 years (almost 50%) for cohorts 1947-49. We extend our analysis to the household context and show that lifetime earnings are also related to the life expectancy of the spouse. The heterogeneity in life expectancy has sizable and relevant distributional consequences for the pension system: when accounting for heterogeneous life expectancy, we find that the German pension system is regressive despite a strong contributory link. We show that the internal rate of return of the pension system increases with lifetime earnings. Finally, we document an increase of the regressive structure across cohorts, which is consistent with the increasing longevity gap.