Funding procedure

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The funding principle (also: fully funded scheme ) is a calculation and financing method of (private) individual insurance as well as social , based on compulsory membership.

The savings from the contributions of the insured are invested in the capital market and a cover capital is formed for each individual insured , which should cover the benefits to be paid after the savings. All current and future claims are serviced from this individual reserve capital in the corresponding amount. The coverage ratio provides information about the percentage of the obligations that are covered by assets.

An alternative calculation and financing method in social insurance is the pay-as-you-go method .

Entitlement coverage procedure and funding procedure

There is capital coverage for insurance benefits in social insurances with compulsory membership in the form of the entitlement cover procedure and the capital cover procedure (in the narrower sense).

In the case of the entitlement coverage method, the necessary amount of the reserve capital is calculated according to actuarial principles, i.e. taking into account the probability of death ( mortality table ) and the expected return on capital on the capital market. This results in the necessary contribution amount. The cover capital that is invested on the capital market is saved from the contributions. According to the principle of equivalence , the reserve capital will be gradually paid out later in the form of pension payments.

The funded system is a hybrid of the pay-as-you-go system and the pension fund system. Here, too, a cover capital determined according to actuarial principles is accumulated. The cover capital is financed jointly by all contributors through an allocation. However, the coverage capital is lower than in the entitlement coverage procedure, since a capital stock is only formed for insured events that have already occurred. Running costs are financed on a pay-as-you-go basis.

Individual insurance

Insurance policies that are not based on compulsory membership (e.g. private life insurance) are calculated according to the individual equivalence principle. The premiums are calculated according to the following calculation bases:

  1. Amount of insurance benefits
  2. Probability of occurrence
  3. Duration of the contracts
  4. expected interest rate
  5. Closing and administration costs

There is a regular payment of a sum of money by the policyholder. The acquisition and administrative costs, as well as any hedging of the risk not yet covered by the reserve capital, are financed from the contribution payments. The remaining amount is invested in the capital market. The reserve capital is formed from this. Each insured person is kept as a separate account, the amount of which is determined solely by their own contributions. In many cases, the formation of the reserve capital is regulated by law. In the event of a benefit, the reserve capital is paid out in one fell swoop or gradually depending on the agreement.

Examples:

history

The pension scheme , first introduced by Otto von Bismarck in 1889, was designed as a funded system.

After the First World War , the reserves of the pension insurance were largely devalued by the subsequent hyperinflation. The net worth of the Deutsche Rentenbank had melted from 2.12 billion marks (in 1914) within a decade to a remainder of only 14.6% of the total. The risk of loss of capital described in the “Risks” section had occurred. In response, some pension payments began to be funded from incoming contributions (that is, pay-as-you-go) and the state helped out with tax revenues. However, massive cuts in benefits were inevitable.

Apart from brief periods, there was never sufficient funding. In particular, inflation and the two world wars ruined the attempt. That is why the pension system was actually operated in a kind of pay-as-you-go system long before 1957. The system of funded funding was converted into a pay-as-you-go system with a dynamic pension in the 1957 pension reform under Konrad Adenauer . This made it possible to suddenly improve the economic situation of pensioners. The remaining capital of the insurance was consumed in the following years. Due to the subsequent economic upswing and the increase in population, the critics who called for a reconstruction of the capital stock fell silent in the following years. Since the pill break , the advantages and disadvantages of the funded procedure have been increasingly discussed in specialist circles. In Germany the proposal were from under Walter Riester of Riester factor as well as the proposal from the Rürup Commission of the sustainability factor in the pension adjustment formula this effecting a reduction in contributions to the integrated statutory pension insurance and at the same time reducing the amount of pension. At the same time, in the course of the pension reform in 2001 with the so-called Riester pension and in 2005 with the Rürup pension, private pension insurance based on capital coverage and tax-privileged were introduced, which are intended to make it possible to compensate for the reduction in the pensions of the statutory pension insurance through private savings.

Discussion on the switch to the funded procedure

The question of whether pension insurance and long-term care insurance should be converted from the pay-as-you-go system to the funded system is politically controversial. The funded procedure is theoretically supported by the neoclassical theory , while post-Keynesian a general superiority over the pay-as-you-go system is denied.

Demographics

In the pay-as-you-go statutory pension scheme, it is to be expected that in the future either the contributions will have to be increased or the pensions will have to be reduced in order to offset the effects of demographic change . It is discussed whether a change from the pay-as-you-go to the funded system could result in a lower burden for the contributors. A differentiated view is possible if the two characteristics of demographic change are conceptually separated: the increasing life expectancy on the one hand and the low birth rates or the shrinking population on the other.

Increasing life expectancy

A longer life expectancy for pensioners inevitably means that the funds available to finance their pensions must be stretched over a longer period of time (unless the retirement age is increased). There is only less money left over for pension payments each month. This mechanism applies in every pension system, whether it is a pay-as-you-go system or a funded system. Changes in life expectancy therefore affect both system types in the primary effect in the same way.

Shrinking population

Assuming a closed economy and constant labor productivity, both in the pay-as-you-go system and in the funded system, as the population falls, pension benefits will decrease. In the Solow model of a closed economy on the optimal growth path, the interest rate (= return on the funded system) is equal to the growth rate of the workforce (= return on the pay-as-you-go system). Assuming a closed economy, the funded system is just as strongly affected by demographic developments as the pay-as-you-go system.

In the real open economy, however, capital can be invested abroad . This gives you the chance to achieve higher returns abroad in the funded procedure. On the basis of this consideration, Börsch-Supan et al. Assume that the decline in yields triggered by demographic change in the funded system would be only one percent and thus less than the decline in internal yields in the pay-as-you-go system. However, only average returns are considered; the recurring scenarios in which there is a partial asset meltdown are not taken into account in these simulations.

With foreign investments there are additional risks (political risk, exchange rate risk, higher and more difficult to calculate inflation). As most of the industrialized countries are facing demographic change, there would be only investment in emerging markets in the medium term ; the risks of such investments have recently become apparent in the tequila crisis, the Asian crisis or the Brazilian crisis . In addition, an outflow of capital abroad has negative effects on the domestic economy.

Risk of Capital Loss

The funded procedure creates high capital reserves. For these, long-term, secure investment opportunities must be found that are scarce depending on the situation on the capital markets. There is a comparatively high investment risk, especially when the inflation rate is high and during economic crises . Ultimately, the transition to the funded procedure does not increase the economic security of future generations of pensioners, so from the point of view of opponents and critics it does not represent a solution to demographic problems due to the associated macroeconomic risks.

The will of Meinhard Miegel objected that "... in the event of an economic collapse (the funded system) the PAYG pension system - as explained -. Can be reactivated at any time"

There is no investment risk in the pay-as-you-go system. The specific risk in the pay-as-you-go system, however, lies in the termination of the social consensus on which the pay-as-you-go system in the intergenerational contract is based.

Impact on National Income

According to the Mackenroth thesis , the pay-as-you-go system is allocation - neutral , since the social expenditures of an economy (including pensions) always have to be provided from the current national income. Pay-as-you-go and funded procedures are just different procedures with which the given national income is distributed.

However, based on the Barro-Feldstein controversy from the 1970s to the present day, there is controversial debate as to whether a pension insurance based on the funded system compared to a pension insurance based on the pay-as-you-go system (in the form of the generation contract) leads to higher overall economic savings and, as a result, higher economic growth and thus later Periods can cause a greater distributable national income.

With the pension reform in Chile , a change was made for the first time from the pay-as-you-go system to the funded system, and the results were carefully analyzed. Other South American countries followed the example of Chile. In the countries in which the pension system was switched from the pay-as-you-go system to the funded system, it was found that in many cases the savings rate did not increase, and in some cases even decreased. A connection between the way the pension system is organized and the level of the savings rate could therefore not be established. Orszag and Stiglitz come to the conclusion that the introduction of a funded system does not in itself have any macroeconomic effects. The fact of the introduction of a funded system does not in itself lead to an increase in the macroeconomic savings rate, but rather depends on the further behavior of citizens and the state. The introduction of a funded system, for example, does not lead to an increase in the overall savings rate if the pension savings merely replace other forms of capital investment. The same is the case when citizens or the state take on debt as part of the pension changeover to the same extent as a capital stock is built up in the savings phase. In Chile, the changeover to the funded system led to a net reduction in the savings rate as the conversion costs were very high. At the same time, however, the introduction of the funded pension led to the maturation of the previously underdeveloped Chilean capital market, which had a positive effect on the additional voluntary savings behavior of the Chileans and thus also on the overall economic saving rate.

Changeover effects

When switching from the pay-as-you-go system to the funded system, one generation of insured persons will be charged twice. In addition to the services that are still necessary to pay the claims of the beneficiaries that have already been acquired (in the pay-as-you-go system), they would have to make contributions to building up a capital stock from which they will receive their services in the future. The opposite effect occurred when the pay-as-you-go system was introduced. The first generation of insured persons received benefits even though they had paid little or nothing. Introduction gains are also used here.

Johann Eekhoff recommends that the changeover be carried out suddenly. In long-term care insurance it is possible to guarantee a monthly contribution of a maximum of € 50 by switching to funded coverage, while the deficits are borne by tax revenues. Of course, the burdens are high in the first few years after the changeover, but future care cases will already bring a small amount of capital with them, so that the burdens on the tax budget will continue to decrease.

Formation of the capital stock

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In the opinion of the critics, the creation of a capital fund already causes macroeconomic problems. With a shrinking population, an increase in the economic savings and investment quota would be necessary over a longer period if the future strong pensioner cohorts are to be supplied from additional growth. The attempt to save more economically could fail, however. It is associated with a decline in consumer goods demand, which is not readily offset by more investment. Although the higher planned savings may lead to interest rate cuts, this stimulating effect on investments is unlikely to offset the demand-related deterioration in sales opportunities. On balance, a decline in entrepreneurial profits is therefore to be expected, if there are not even production and employment losses. Both are hardly suitable for stimulating investment activity; A decline in investment and thus the opposite of the hoped-for effects could sooner be achieved. Incidentally, interest rate cuts would also affect the returns in the funded system.

Even if the formation of a capital fund were possible without significant losses in growth, its future relief effect remains uncertain. With an increasing number of pensioners, a partial dissolution is necessary, which increases the capital market supply and possibly greatly reduces the value of the fund. By relieving savings, the demand for consumer goods also increases. With full employment there are price increases, i. H. the employed are forced to forego real consumption through higher prices instead of higher contributions. The inflation process would also contribute to a further devaluation of the capital stock.

Proponents point out that increased capital formation tends to lead to falling interest rates and thus to better growth opportunities for the economy, but at the same time also to falling returns on capital.

States with funded procedures

See also

literature

supporting documents

  1. ^ A b Matthias Graf von der Schulenburg: Insurance Economics: A Guide for Study and Practice. Verlag Versicherungswirtschaft, 2004, ISBN 3-89952-122-6 , p. 374.
  2. ^ Martin Lengwiler : Risk policy in the welfare state. The Swiss accident insurance (1870–1970). 1st edition. Böhlau, 2006, ISBN 3-412-08606-1 , p. 132.
  3. ^ Matthias Graf von der Schulenburg: Insurance Economics: A Guide for Study and Practice. Verlag Versicherungswirtschaft, 2004, ISBN 3-89952-122-6 , pp. 374, 375.
  4. ^ Martin Lengwiler: Risk policy in the welfare state. Swiss accident insurance (1870-1970). 1st edition. Böhlau, 2006, ISBN 3-412-08606-1 , pp. 132, 133.
  5. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics , Addison-Wesley Verlag, 5th edition. 2009, ISBN 978-3-8273-7363-2 , p. 347.
  6. ↑ a b Hermann Ribhegge: The influence of alternative conceptions of old-age security systems on the security level, old-age poverty and income distribution: A comparison between Germany and the USA. In: Richard Hauser: Alternative Concepts of Social Security. Duncker & Humblot, 1999, ISBN 3-428-09784-X , p. 172.
  7. ↑ Christian Christen: "Political Economy of Old Age Security - Critique of the Reform Debate on Intergenerational Justice, Demography and Funded Financing". Marburg 2011, ISBN 978-3-89518-872-5 ; Chapter 6 "Financing the old-age pension".
  8. ↑ Helberger, C. and Rathjen, D. (1998): Incorrect expectations of life expectancy in funded and pay-as-you-go old-age insurance, p. 398. In: Galler, HP; Wagner, GG (ed.): Empirical research and economic policy advice. Festschrift for Hans-Jürgen Krupp on his 65th birthday. Frankfurt am Main 1998 ("Economics" series 38).
  9. ↑ Friedericke Trappe: On the sustainability of social security systems. Lit Verlag, 2000, ISBN 3-8258-5063-3 , pp. 59, 60.
  10. ↑ a b Hagen Welfens, Börsch-Supan: Springer's Handbook of Economics 2: Economic Policy and World Economy. 1st edition. Springer, 2009, ISBN 978-3-540-61262-9 , p. 206.
  11. ^ A b Heinz Rothgang: Theory and Empirical Care Insurance. 1st edition. Lit Verlag, 2010, ISBN 978-3-8258-1342-0 , p. 81.
  12. ^ A b Martin Lengwiler: Risk policy in the welfare state. Swiss accident insurance (1870-1970). 1st edition. Böhlau, 2006, ISBN 3-412-08606-1 , p. 133.
  13. ↑ M. Miegel, in: German Institute for Retirement Provision: Returns on Statutory Pension Insurance Compared to Alternative Forms of Investment, Frankfurt am Main, 1998, p. 14.
  14. ^ Franz-Xaver Kaufmann: Social policy and welfare state: Sociological analyzes. 3. Edition. Vs Verlag, 2009, ISBN 978-3-531-16477-9 , p. 191.
  15. ^ A b Heinz Rothgang: Theory and Empirical Care Insurance. 1st edition. Lit Verlag, 2010, ISBN 978-3-8258-1342-0 , p. 75.
  16. ^ Heinz Rothgang: Theory and Empirical Care Insurance. 1st edition. Lit Verlag, 2010, ISBN 978-3-8258-1342-0 , p. 75.
  17. ↑ Ebert Foundation: Old-age security policy: broader compulsory insurance, withdrawals of benefits, supplementary private provision, guaranteed minimum income.
  18. ↑ Peter R. Orszag, Joseph E. Stiglitz: Rethinking Pension Reform: Ten Myths About Social Security Systems. presented at the World Bank's "New Ideas About Old Age Security" conference , Washington, DC, September 14-15, 1999.
  19. ^ C. Mesa-Lago: Changing social security in Latin America: toward alleviating the social costs of economic reform. Boulder, London 1994, p. 132.
  20. ↑ OECD: Latin American Economic Outlook 2008. 2007, ISBN 978-92-64-03826-4 , p. 74.
  21. ^ Ribhegge, p. 135.
  22. ↑ Bethold E. Wigger: Fundamentals of public finance (Springer textbook). 2nd Edition. Springer, 2007, ISBN 978-3-540-28169-6 , p. 224.
  23. ^ Johann Eekhoff: Employment and social security. 4th edition. Mohr Siebeck, 2008, ISBN 978-3-16-149688-2 , pp. 176, 177.