nr 064 - Risk Sharing and Efficiency Implications of Progressive Pension Arrangements

DNB Working Papers
Date 9 December 2005

The present paper aims to quantify the welfare e.ects of progressive pension arrangements in Germany. Starting from a purely contribution-related benefit system, we introduce basic allowances for contributions and a flat benefit fraction. Since our overlapping-generations model takes into account variable labor supply, borrowing constraints as well as stochastic income risk, we can compare the labor supply, the liquidity, and the insurance effects of the policy reform. Our simulations indicate that for a realistic parameter combination an increase in pension progressivity would yield an aggregate effciency gain of more than 2 percent of resources. However, such a reform would not be implemented because it would not find political support of the currently living generations. JEL Classiffcation: H55, J26. Keywords: Pension reform, idiosyncratic labor income uncertainty.