Determining factors for sustainability and distributional effects of pension systems

Abstract

The preceding chapter has focused on the major objectives of pension policies, in other words on the question ‘what are pension systems aiming for?’. The present chapter takes a step forward and asks how these objectives may be achieved under the assumption that informal old-age security (provided within the family) is not sufficiently available to the majority of retired people. This analysis is a partial analysis of old-age security in a small open economy within the framework of an existing social security system that provides insurance against the most important social risks by social security schemes, i.e. unemploy- ment, illness, long-term care and working incapacity, and ensures a socio- economic subsistence income. The assumed extent of insurance is described briefly. All individuals are obliged to have fundamental health insurance and long-term care insurance. People who have no means to afford the premiums themselves and have no relatives who are legally obliged to support them receive public subsidies to their contributions. The compulsory long-term care insurance covers the costs of nursing care and – if necessary – grants for the accommodation in a nursing home in case people are in need of long-term care, especially in old age. Unemployment insurance is compulsory for all gainfully employed people in- cluding the self-employed. It is publicly organised and based on contributions, calculated as a fixed percentage of earnings. In case of unemployment, it pays a benefit that replaces about two thirds of former net earnings. The duration of pay- ment depends on the insurance period before becoming unemployed, but does not exceed one calendar year. Furthermore, gainfully employed people are obliged to be covered by working incapacity insurance, financed by contributions as a per- centage of earnings. In case of long-term incapacity, the insurance pays an inca- pacity pension until retirement age at the level of the old-age pension a person of the same age and profession is on average entitled to after a representative work- ing life. All social security schemes also cover the contribution payments to the other schemes during the period of benefit receipt.1 Subsidiary to this social secu- rity system, there exists a final safety net in the form of a means-tested social as- sistance. This tax-financed element provides a socio-economic subsistence benefit to those people who have insufficient resources available on the household level to make their living and are at risk of social exclusion. 1