Private Pension Savings Increase Thanks to Annual Information Letters

The information letters sent out annually by the German pension authority (Deutsche Rentenversicherung) encourage contributors to the statutory pension insurance fund to invest more money in private pension schemes. Whilst these letters result in an increase in labour supply, they simultaneously have a negative effect on charitable donations. This is the finding of a recent study conducted by the Centre for European Economic Research (ZEW) in Mannheim.

Whilst the number of recipients of pension benefits in Germany is increasing, and the pension payment period becoming increasingly longer, the number of young people contributing to the statutory pension insurance fund continues to fall. As a result, the pay-as-you-go insurance scheme in Germany is becoming less and less viable. In order to improve the German state pension scheme and establish an additional private pension plan, it is necessary that more transparent information on viable alternatives is provided.

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The study shows that for the period between 2001 and 2010, the introduction of the pension information letters in 2004 has resulted in a sharp increase in contributions being made to private retirement schemes. The annual contributions to private pension schemes in Germany increased by an average of 40 euros, or 33 per cent, for the upper age group of individuals aged 55 or above. The average annual contribution made by individuals in the lower age group, aged 27 or above, also increased by 16 per cent (20 euros per year). On the one hand, the information letter seems to have had a negative impact on charitable donations during the survey period. On the other hand, the letter has had a positive effect on labour supply, motivating more individuals aged 27 or older to invest in private pension plans.<o:p></o:p>

"Pragmatic information about expected pensions is of great importance"<o:p></o:p>

ZEW researchers evaluated the pension reform in 2001 using the German Taxpayer Panel by the German Federal Statistical Office, which is based on statistics on personal annual income tax returns. As of January 2004, the German pension authority began sending out pension information letters to all members of the statutory insurance scheme aged 27 or older and who had been paying social security contributions for at least five years. Before the introduction of the letters, all individuals contributing to the insurance scheme aged 55 or older received so-called "pension statements", which contained detailed information on the individual's pension entitlements as well as on the expected pension payments.<o:p></o:p>

"Our findings show just how important pragmatic information on expected pension payments is," explains Professor Andreas Peichl, head of ZEW’s Research Group "International Distribution and Redistribution" and co-author of the study. "The pension reform in 2001 did not result in tangible increases in pension payments. It has, however, led to a more transparent information policy, providing a clearer picture of the expected pension payments. Hence, the information letters, which might seem like a small detail, helped achieve the goals set by policy-makers: they increased the proportion of private pension schemes in the German pensions system."<o:p></o:p>

A further finding of the study is that German taxpayers tend to overestimate their expected pension payments.  This suggests that future reforms of the pensions system, designed to improve its sustainability, might be made more transparent and prevent recipients from overestimating their future claims.

For more information please contact:

Prof. Dr. Andreas Peichl, Phone +49(0)621/1235-389, E-Mail peichl@zew.de

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