SOCIAL SECURITY, PENSIONS & RETIREMENT INCOME eJOURNAL
"Limited Computational Ability and Social Security"
International Tax and Public Finance, 20(3), 414-433 (2013)
We revisit the role of social security in countering inadequate saving for retirement. We compute the optimal social security tax rate for households who lack the computational ability to solve dynamic optimization problems. Instead, they follow the simple rule of thumb of consuming and saving a fixed fraction of disposable income. This departs from the tradition of computing the optimal tax rate when households suffer from some type of behavioral bias yet possess the ability to solve dynamic optimization problems. Our general equilibrium model is calibrated to the moments of the distribution of saving rates in the US, and our results are generally supportive of a social security program as large as the one in the US.
TABEA BUCHER-KOENEN, Munich Center for the Economics of Aging, Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Social Law and Social Policy
SEBASTIAN KLUTH, Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Social Law and Social Policy
One important parameter in the decision process when buying a private annuity is individuals´ subjective life expectancy, because it directly influences the expected rate of return. We examine the market for private annuities in Germany and evaluate potential selection effects based on subjective life expectancy. First individuals are pessimistic about their life span compared to the official life tables. Second we find a significant selection effect based on subjective life expectancy for women who invest in private annuity contracts - so called Riester pensions. For men there seems to be no difference in subjective life expectancy by Riester ownership. Comparing the size of this selection effect with the underlying loading in life expectancy charged by the insurance industry shows that the latter appears to be in line for women but very high for men. Our findings have strong policy implications. On the one hand misperceptions about longevity risk might prevent individuals from providing sufficiently for retirement. On the other hand mandated unisex tariffs might especially discourade men from investing in Riester pensions, for them premiums in life expectancy are particularly high compared to subjective expectations.
MICHAEL ZIEGELMEYER, Banque centrale du Luxembourg, Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Social Law and Social Policy
JULIUS NICK, University of Mainz
Financing pensions in the EU is a challenge. Many EU countries introduced private pensions schemes to compensate declining public pensions levels due to reforms made necessary by demographic change. In 2001, Germany introduced the Riester pension. Ten years after introduction the prevalence rate of this voluntary private pension scheme approximates 37%. However, numerous criticisms raise doubts that the market for Riester products is transparent. Using 2010 German SAVE survey, this paper investigates for the first time terminated and dormant Riester contracts on a houshold level. Respectively 14,5% and 12,5% of households who own or have owned a Riester contract terminated it or stopped paying contributions. We find that around 45% of terminated or dormant Riester contracts are caused at least partly by product-related reasons, which is significantly higher than for endowment life insurance contracts. Uptake of a new contract after a termination is more likely if termination is product-related. Nevertheless, after termination 73% of households do not sign a new contract, which can have serious long-term consequences for old-age income. Households with low income, low financial wealth or low pension literacy are more likely to have terminated or dormant contracts. Low income and low financial wealth households also have the lowest prevalence rate of Riester contracts and are higher risk of old-age poverty.
As in many other countries, recent developments in demographics and financial markets are having a serious impact on pension systems and contracts in the Netherlands. For example, people living longer and being in good health is a major joint achievement of our welfare states and of medical science. However, these achievements demand a new approach to pension provision when tackling both longevity and aging societies. Traditional occupational DB pension provision has become too expensive for plan sponsors, and new solutions need to be found. On top of these trends we see an increasing individualization in European societies: people no longer participate in (mandatory) collective systems for the sake of solidarity alone; there needs to be a benefit for all. Sharing comparable risks at fair prices and costs has historically been well accepted, but redistribution of welfare in the name of inter-generational solidarity brings more discussion to the table. This article describes a new Dutch pension contract designed to address these challenges.