Sebastian Kluth

Should I Stay or Should I Go? The Role of Actuarial Reduction Rates in Individual Retirement Planning in Germany

This Paper provides a two-part empirical analysis on how actuarial reduction rates for early retirement affect current pension payments in Germany and to what extent the existence and the magnitude of such reduction rates influence people’s retirement planning. First, when looking at administrative records, early retirement shows a high prevalence at the extensive and at the intensive margin, in particular for women and medium income insurant. Second, a special question in the 2011 SAVE survey is exploited where respondents are offered a hypothetical deal for early retirement if in turn they are willing to accept an actuarial reduction on their pension. It becomes evident that the maximal reduction rate people would be willing to accept is widely dispersed and on average roughly double the current legal rate. Furthermore, respondents seem to make consistent choices and high endowment of financial assets and additional old age provision, high subjective life expectancy, bad health as well as being a man are positively correlated to the actuarial reduction rate the respondents would accept at most. Given that policymakers aim to increase the average retirement age, the results emphasize the need for a simultaneous increase of not only the statutory retirement age but the minimum early retirement age as well, since actuarial reduction rates cannot be expected to change the retirement behavior of workers with a strong preference for early retirement or those who rely on social benefits.

Auf der Suche nach der besten Rentenanpassungsformel (On the Hunt for the Best Pension Adjustment Formula in Germany)

Due to its complexity and incomprehensibility the mechanism for the annual pension adjustment in Germany has experienced rising criticism. We compare the actual formula and alternative adjustment proposals on the basis of different criteria. It will become 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, it guarantees pensioners’ participation in the technological progress, it balances the opposing goals of stable contribution rates and stable replacement rates, it 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 don’t adequately account for future demographic changes.