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.