Volume 1, Issue 4

In the academic debate on systems of old-age insurance no question is as controversial and as vigorously discussed as the choice between funded and unfunded financing modes. At first glance this is surprising because this choice seems to involve only an efficiency problem. However, closer inspection reveals that a change of the financing system implies redistribution, if not within, at least among, different generations. In this contribution, the present state of knowledge on the functioning and the effects of the two financing systems is summarized. The analysis focuses on a comparison of rates of return and risks involved in each system and on the problems connected with a transition from unfunded to funded pensions. As a result it is argued that without reference to specific criteria of distributive equity among generations the nowadays popular call for radical reform of unfunded social security systems is not well founded.

The paper outlines different concepts for designing pension policies linked to current reform proposals in Germany. The role of the state, mandatory or voluntary savings for old age and the primary objectives and types of income redistribution aimed at by the design of pension schemes are central. In contrast to the economic debate which is dominated by the topic pay-as-you-go (PAYG) versus funding, the author argues that it is especially important to deal with changes within the major German PAYG-financed scheme in order to realize positive economic and social effects, especially by a close contribution±benefit link as part of a broader reform concept. There are, however, limits to an overall reduction of the pension level in such a pension scheme, if a close contribution±benefit link is to remain politically acceptable. Here this is demonstrated by current reform proposals for substituting a major part of PAYG pensions by funded pensions in Germany. The paper also points out some hidden, implicit and long-term effects of such a strategy. Finally, the author refers to some often neglected effects in mainstream proposals for a major shift towards funding. 430

Almost all OECD countries have pension reform at the top of their social policy agendas. This paper explores where empirical analysis might help to shed light on the central questions concerning pension reform. The first part of the paper addresses modifications of the current pay-as-you-go systems: How do we regulate the retirement age? Do we need a system of transparent notional accounts? The second part concerns a (partial) transition from a pay-asyou- go to a fully funded system: What does empirical analysis have to say about a Pareto-improving transition? Which distortions can be reduced? What do we know about the effects on saving, productivity and economic growth? Finally, the third part addresses questions about the design of funded pension systems: How expensive is their administration? Are tax incentives sufficient or do we need mandatory savings programmes in order to guarantee sufficient pension levels?

The rate of return in a PAYG pension system is typically lower than in a funded system. This lower rate of return generates a loss for the contributors which basically acts like an implicit income tax. In this paper, we argue that the implicit income tax is an excellent measure with which to evaluate the upcoming pension crisis in Germany and that it is also much better suited than other measures (such as the contribution rate, the pension level or the rate of return) to understand the impact of various reform scenarios. We also calculate the development of the implicit tax for prominent reform proposals in Germany.