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Privatization of Pensions: Good, Bad or just Ugly?

Privatization of Pensions: Good, Bad or just Ugly?. Wilfried Prewo February 24th, 2006.  IHK Hannover. Demographic Developments in Germany. Increasing Life Expectancy. Decreasing Birth Rates. Age Structure in Germany. 1910-2000-2030 in Germany. Source: Statistisches Bundesamt.

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Privatization of Pensions: Good, Bad or just Ugly?

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  1. Privatization of Pensions: Good, Bad or just Ugly? Wilfried Prewo February 24th, 2006  IHK Hannover

  2. Demographic Developments in Germany Increasing Life Expectancy Decreasing Birth Rates

  3. Age Structure in Germany 1910-2000-2030 in Germany Source: Statistisches Bundesamt

  4. Demographic Trends in Germany

  5. Expected Development of the PAYG-Pensions

  6. Strategies to Solve the Pension Crisis • Immigration • Increasing labor force participation and producivity • Switching from PAYG to fully funded pensions - Pension reductions (e.g. increasing retirement age, no nominal increase) - Individual retirement savings (tax treatment )

  7. Retirement Plans: Government, Employer, Individual Plans

  8. Financing the Transformation from PAYG to Fully Funded Pensions necessary contribution to replace PAYG social security by fully funded pensions: 12 % of income Financing plan: 5 %: Increase of working time from 40 to 42 hours per week 0.72 % Reduction of sickleave payments from 100 % to 80 % 1.5 % Reform of the unemployment insurance ~ 8 % Two thirds can be fully funded without "sacrificing" current income

  9. Contributions for Fully Funded Pensions under Different Conditions Assumptions: • Saving period: 45 years • Pension period: 16 years (age 68-83) • Monthly pension: 1,170 Euro (payment out of interest and capital stock) I 1.5 % 260 € 10.4 % Cases: II 2.0 % 221 € 8.8 % III 3.0 % 159 € 6.4 % • Real interest rate: • Necessary saving p.m.: • Relative to average income (2,500 € p.m.):

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