Social Security and Retirement in Germany

This paper describes the German public old age social security program (,Gesetzliche Rentenversicherung') and its incentive effects on retirement decisions. The paper presents the key features of the system and expresses retirement incentives in the form of accrual rates of social security wealth and implicit tax rates on earnings. It summarizes labor market behavior of older persons in Germany during the last 35 years and surveys the empirical literature on the effects of the social security system on retirement in Germany. The paper shows that even after the 1992 reform the German system is actuarially unfair. This generates a substantial redistribution from late to early retirees and creates incentives to early retirement. Indeed, average retirement age is very low in West Germany (about age 59) and even lower in East Germany. This tendency towards early retirement is particularly hurting in times of population aging when the German social security contribution rate is expected to increase dramatically and will substantially exceed the rates in other industrialized countries.