Pension reform with variable retirement age - A simulation analysis for Germany

Hans Fehr, Manuel Kallweit, Fabian Kindermann
University of Wuerzburg, Germany

Germany has introduced in 2007 a pension reform which increases the normal retirement age between 2012 and 2029 from currently 65 to 67 years. 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 for Germany and distinguishes three skill classes with different life expectancies within generations. Most importantly, individuals chose 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 old-age poverty rates in Germany considerably. Second, the considered reform of 2007 will increase effective retirement by about 11 months and redistribute towards future cohorts. However, it will also further increase old-age poverty since rich people are more flexible in adjusting retirement. Overall, the efficiency gains of the reform are very modest. Third, reform packages which aim to reduce old-age poverty may even harm future cohorts and come with significant efficiency cost.

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