The Budget Impact of Reduced Early Retirement Incentives on the German Public Pension System

Early retirement in Germany is very costly and amplifies the burden which the German public pension system has to carry due to population aging. Earlier analysis has shown that an important reason for the large extent of early retirement in Germany is the force of early retirement incentive built into the German public pension system. This paper estimates the budget effects of various pension reforms that reduce the incentives to retire early. They combine elements of the 1992 and 2001 reforms. The introduction of a 6 % per year actuarial adjustment implies a reduction of pension expenditures for a typical cohort born in 1942 (and thus still mainly governed by the pre-1992 pension rules) by 18 % in direct benefit reductions and by an additional 26 % through labor supply responses. The introduction of the hypothetical common pension system, used as a yardstick in all country chapters of this book, which features an early retirement age of 60 years, a normal retirement age of 65 years, a 60 % replacement rate at age 65, and a 6 % per year actuarial adjustment, pivoted at age 65, will reduce pension expenditures by 37 % directly and by about 26% through labor supply responses, relative to the pre-1992 system in Germany. This system has a steeper actuarial adjustment and a deeper pension cut than introduced by the actual 1992 and 2001 reforms. Addresses