Pension Reform with Variable Retirement Age - A Simulation Analysis for Germany

Abstract

In 2007 Germany has introduced a pension reform which increases the normal retirement age from currently age 65 to 67. The present study aims to quantify the macroeconomic, welfare and efficiency consequences of this reform by means of a computable general equilibrium model with overlapping generations. Our model features the most recent demographic projections and distinguishes three skill classes with different life expectancies within generations. Most importantly, individuals choose their effective age when they exit from the labor market and start receiving pension benefits. Our quantitative analysis indicates three central results: First, the previously implemented pension reductions are not able to stabilize long-run contribution rates and increase future old-age poverty rates in Germany considerably. Second, the considered reform will increase effective retirement age by about one year and redistribute towards future cohorts. However, it hardly reduces old-age poverty since rich people are more flexible in adjusting retirement. Overall, the efficiency gains of the reform are very modest. Third, supplementary policy should raise the actuarial adjustment factor while other reform packages aimed to reduce old-age poverty may be associated with significant efficiency cost.