Testing the Assumptions concerning the Effects of the German Pension Reform Based on Latin American and Eastern European Outcomes

Abstract

The pension reform, approved in Germany in 2001, and implemented on January 1, 2002, has been described by the Federal Minister of Labour and Social Affairs, Walter Riester, as ‘one of the greatest social reforms this country has seen’ (Federal Ministry, 2002a) and it has prompted considerable discussion and publications. This article analyses key assumptions on the effects of the German reform in the light of two decades of experience with structural pension reforms (‘privatisation’) in Latin America. This region has pioneered this type of reform and has influenced both the international debate and changes in other regions such as Eastern Europe. The article has four objectives: (1) to elaborate a taxonomy of old-age structural pension reforms in the world and place Germany's within it; (2) to identify and analyse crucial assumptions related to the effects of the German reform (incentives for affiliation, competition and administrative costs, impact on the level of pensions, sustainability of the public pension contribution ceiling, and effects on national saving, fiscal costs, the capital market and investment returns); (3) to contrast those German assumptions that are similar to their counterparts in Latin America with data collected on real outcomes from the pension reforms in several countries of that region and, to a lesser extent, from a few Eastern European countries (the two regions combined embrace more than 80 million insured persons in private pensions); and (4) to summarise our findings and draw some useful lessons. Economic, social security and other differences between Germany and the countries compared will be taken into account in the analysis.

Evaluación de un cuarto de siglo de reformas estructurales de pensiones en América Latina

“…Entre 22 países con reformas estructurales, sólo uno fuera de América Latina ha introducido un modelo sustitutivo (Mesa-Lago y Hohnerlein, 2002).…”

“…El pilar público tiene sus cuatro características típicas, y el pilar privado también sus cuatro características, salvo que la administración es múltiple en los cuatro países. Fuera de América Latina este modelo es el más extendido y se aplica al menos en 12 países de Europa occidental y oriental (Mesa-Lago y Hohnerlein, 2002;Müller, 2002).…”

An appraisal of a quarter-century of structural pension reforms in Latin America

“…countries which have carried out structural reforms of the pension system, only one outside Latin America has introduced a substitutive system (Mesa-Lago and Hohnerlein, 2002).…”

“…The public pillar has its four typical characteristics, as does the private pillar, except that the management of the latter is on a multiple basis in all four of the countries. This is the most widely adopted model outside Latin America and is applied in at least 12 Western and Eastern European countries (Mesa-Lago and Hohnerlein, 2002;Müller, 2002).…”

“…Before the structural reforms, Latin American public systems could be classified in three groups, according to the time when the pension system was introduced 8 There is a worldwide debate on the supposed effects of structural pension reforms. See Orszag and Stiglitz (2001), Barr (2002) and Mesa-Lago (2002 and2004b). 9 For greater details, see Mesa-Lago (2004a .…”