Labor and budget effects of actuarially correct pension adjustment factors in the public pension insurance

A central element of the federal government’s demographic strategy is to increase the labor market participation rate of older people. In this context, it is necessary to implement “accurate“ adjustment factors for an earlier or later retirement age in order to avoid negative incentive effects. However, several studies (Börsch-Supan 2004, Gasche 2012 und Werding 2012) come to the conclusion that the adjustment factors currently implemented in the German public pension system are too small. This project analyzes the effects of higher adjustment rates on labor market participation of older workers and on the budget of the German Public Pension Insurance. We first estimate the effects of higher adjustment rates on the retirement probability using an option value model (see. project 1.057). Afterwards, we simulate the effects on the labor market and the Public Pension Insurance by using the results of the first step in the pension simulation model MEA-Pensim (see project 1.004). In a last step we simulate the effect on all social insurances and the public finances using the Social Insurance Model, Version 2011 (SIM.11). Compared to older studies we receive a smaller effect after increasing the deduction rate. This is partially related to some changes in the estimation strategy, but also to many different recent reforms of the incentives in the public pension system. In fact, the maximal effect appears for men living in West Germany. Their average retirement age increase by 0.32 years. Consequently, the effects on the labor market, social insurances and public finances are also small. The labor force increases in the best case at first by 150.000. The contribution rate to the public pension system decreases by 0.6 percentage points. The total contribution rate of all social insurances decreases by 0.8 percentage points. The financial deficit of the general government budget decreases by 0.5% of the BIP. The results were summarized in a final report. This project was a cooperation with Prof. Dr. Martin Werding (Ruhr-Universität Bochum).