PAYGO

The allocation procedure is a method of funding social, especially the pension, but also sickness and unemployment insurance. The premiums paid will be directly applicable to the financing of beneficiaries, ie paid back to them. Here, from a social insurance reserves may be formed to a small extent (for example, sustainability reserve the statutory pension insurance ). For his performance contribution of contributors will be eligible for performance in cases of unemployment, disability, illness, and ultimately age.

In contrast to the PAYG contributions are the funded system saved up and earn interest or invested in other forms of investment to providing benefits (eg retirement, in case of illness (see aging provision ) or unemployment ( in the ( private ) unemployment insurance or the payment protection insurance ) ) to be paid.

• 2.1 PAYG in Germany
• 2.2 Pension Insurance by the generation contract
• 2.3 PAYG in selected other countries
• 2.4 Problems in the financing of the PAYG

Properties of the PAYG

Some basic properties of the PAYG system are briefly outlined by the example of old-age security.

Initial debt / guilt inherent

In a PAYG system, the first generation of receivers ( eg pensioners ) receive benefits without having paid for contributions ( to any significant extent ) ( "Introduction profit "). This Engl. as a " windfall gains" or "unfunded liability" ( unfunded liability) designated gift is for the following generations an inherent ( initial) debt that they pay their contributions. As far as the PAYG system remains in place, they get it again claims against their successors. The dismantling of the initial debt so new, inherent liabilities are established. This continues in the system, which thus always an " inherent fault " has.

The amount of inherent guilt remains not stable, but varies to the extent that a " return " is granted as to the contributions. This was at a simple example illustrates: The first generation of pensioners receive total transfers amounting to 100 monetary units, which are funded by the employees of the same period. These contributors expected in the following period, idealized 25 years later, adjusted for inflation, a transfer in the amount of eg 164 monetary units ( equivalent to an annual pension increase of 2%). Mathematically, therefore handle the inherent guilt by a factor of 1.64 ( with n p = 0.64, see section " Return"), which is then also funded by the employees, who then in period 3, a transfer in the amount of 269 monetary units () expect. In general, the inherent debt will have reached after generations of initially 100 worth. Accordingly, a change of system is more expensive, the older the system.

In case of ( adjusted for inflation) negative return conversely decreases the inherent fault. In the hypothetical case of a "last" generation that has no children, this generation would have the cost of their own and the retirement of the previous generation fund.

Effects of population and income growth

Another question is how reflected the inherent guilt with the contributors. Grows whose income synchronously with the return of the PAYG system and remains their number is approximately constant, so does not change regardless of the absolute level of inherent guilt for the individual, the percentage of his income, he has to pay, even if the absolute amount increases steadily. Example: 300 Total employment ( E1 = 300), the 200 units of money earn on average ( GE1 = 200), finance with 100 monetary units (GR1 = 100) 100 pensioners ( R1 = 100). Each employed then has a contribution rate of 16.6% (). In the next period must be re -employed 300 (E2 ) 100 pensioners ( R2) finance, but this - apply now 164 monetary units ( GR2 = 164) - because of the above-mentioned growth. Their absolute number of load is thus increased by 64%. But if they have achieved the same in themselves salary increases of 2%, then their income on E2 = 328 monetary units has grown. The contribution rate, ie the percentage of their income, they have to transfer, therefore, remains stable.

Is the next generation of depositors, however, smaller than the first, perhaps because too few children are born, more people are unemployed or unable to work, then the contribution rate increases - at E2 = 200 (that is, decrease the depositor by one-third ) in the example to 25%. Even more falls from the increase when the average income grows slower than pensions, such as among the employed increases the proportion of part-time workers and low-skilled people.

Compensation from tax revenues

In reality, any deficits can be financed by transfers from general tax revenues ( fluctuation in Germany, and by the eco-tax ). In Germany, tax transfers currently account for about 1 /3 of the expenditure of the statutory pension insurance, which is about 80 billion € or one-third of the federal budget. To the extent to which these taxes are in turn funded by the workers, but thereby increases the effective stress; in proportion as it is financed by public debt, created a different form of inherent guilt.

Justification of the inherent guilt

Liabilities are usually justified because the debtor has received from the creditor a power, such as a loan or an object. In the case of the allocation process, the consideration ( the debtor) can again be seen in the fact that he, as the older generation, had invested heavily in the next generation. Rearing and education of the younger generation, is the work of the older generation that can not be ignored thought without the earned income of the younger generation accounted for. This consideration leads to no generation, a "gift" has received, rather each the younger generation pays back what she has previously received at " donations ".

Another question is how within generations, these loads are distributed: who is for example not pay contributions, the involved or not ( via control transfers) in a completely different form of payments under his own parents / grandparents. Who himself has no children, who has done ( again via taxes) only indirectly and to a lesser extent contributions to the next generation; how extensive, how valuable and how effective are the contributions of the individual to his children, in the current normal PAYG systems also remains unconsidered. Sometimes an attempt is made to take by special design of this load balancing influence, such as the recognition of education years as contribution periods.

Especially on such considerations ignites the question of the justice of a PAYG system and its specific design.

More accurate representation

A mathematical representation of the essential parameter looks like this:

Basic formula

Assuming that the contributions in each period will be retained as a fixed percentage of the wage of employed persons during this period. For these contributions, the pension benefits for retired persons during this period will be financed. In a pure PAYG system must in each period, total premium income consistent with total pension payments:

Contributions in period = Services in period.

Assuming that all the contributors and all recipients are identical, we obtain formally the following budget identity of a PAYG system:

Where the following notation is adopted:

• = Number of contributors in period t
• = Number of grant recipients in period t
• = Wage rate in period t
• = Contribution rate
• = Unit retirement in period t

Yield

The ( average ) return of a PAYG system to a participating individual is calculated as the ratio of the benefits received to the contributions paid, meaningful adjusted for inflationary effects:

.

Because of the budget identity of the PAYG services meet the contributions of the following period, corresponding to the return of the PAYG system in the average growth rate of contributions.

The average return on the payments in a pay-as- can be an example for equation (1) calculated. It is assumed that an individual in a period t contributors, and in the subsequent period t 1 beneficiaries (IAW, the length of working life is consistent with the length of the board time). An individual is paying the amount and receives a pension in height. The resulting yield is:

Where the following notation is used:

• = Growth rate of population
• = Growth rate of the wage rate

Where:, , and

Since the product can be numerically neglected, can be approximated by the rate of return. In a " mature " pay-as so is the contribution rate of return equal to the sum of wage and population growth. This result was first shown by Aaron ( 1966). This reduces the return on PAYG systems, if the population growth decreases or even becomes negative or the wage rate increases will be small.

Demographic changes

The impact of demographic changes on the PAYG system can be illustrated by a shift from equation (1):

.

This formulation determines the budget balancing contribution rate when a desired amount of pension is given. The term

Corresponds to the number of beneficiaries per contributor (also age dependency ratio, age dependency ratio, or old age dependency ratio ), and in the expression

The ratio of ( average) pension amount to (average) wage rate ( the replacement rate ).

Now, if the system experiences financial pressure to basically offer the following options to restore the budget identity:

• Increase in the contribution rate
• Lowering the replacement rate (essentially possible only by reducing the average pension)
• Lowering the dependency ratio (essentially possible only by increasing the retirement age, ie later retirement )

PAYG in practice

PAYG in Germany

In Germany the PAYG system in the Social Security ( DRV pension, legal health, unemployment and accident and the long-term care ) is applied. The level of contributions depends globally on the costs for the services provided, but to ensure income-oriented design guidelines that the individual contribution of load does not exceed a certain level. On the other hand, there are also post lower limits ( in 2005, for example, about 260 EUR per month as a minimum contribution for statutory health insurance).

In addition, since 1 January 2006, the levy is U2 performed for the compensation of the financial burden from maternity leave as a PAYG employer.

Pension by the generation contract

The original system of statutory pension insurance was based on a funded basis, after an accumulated savings of pension contributions was carried out, which were equal to be paid by employers and employees on retirement accounts. Except for short periods, however, never materialized sufficient funding. In particular, inflation and the two world wars undid the attempt. Therefore, the pension system was also operated effectively for a long time in a kind of pay-as before 1957.

The system of funding in 1957 was rebuilt in the pension reform in 1957 under Konrad Adenauer to a PAYG system with dynamic pension. Provided the theoretical basis for the introduction of the PAYG system ( § 1383 RVO, now § 153 SGB VI) the economist and representatives of Catholic social teaching Wilfrid Schreiber with his work " existential security in industrial society," also known as " writer " plan. Writer first used the term " solidarity contract ". He spoke there of a " solidarity contract between two generations." Other than those provided in the recorder chart, the children's pension and double contributions for those without children (now also specifically called a three - generation contract ) were not implemented. Also provided by Schreiber broad financial base by including freelancers and self-employed was not implemented. The family balancing was implemented outside of the pension system, mainly through the child support.

In Switzerland, the term was also introduced in the context of the legal introduction of the Old Age and Survivors Insurance (OASI ) in 1947 in the political debate. The AHV is based on a PAYG. With the introduction of further welfare state redistribution mechanisms - for example, in the Health Insurance Act of 1996 - widened the use of the term also to these areas and today is a widely accepted principle of the Swiss welfare state.

PAYG in selected other countries

• U.S., used in the state pension and Social Security at the National Health Insurance Medicare
• Switzerland, applied in the first column of the three- pillar system
• Japan
• Austria

Problems in the financing of the PAYG

Due to rising health care costs, increasing life expectancy and thus increasing maintenance costs, demographic shifts ( declining birthrate, aging society ), declining wage share, mass unemployment and non-insurance withdrawals and economic crises in many industrialized nations, the question is asked about the future sustainability of the PAYG system often. The financing of insurance in the allocation process is based on the derived from the national income wage ratio. The national income of the Federal Republic of Germany from 1970 - 2000 doubled. Assuming that the national income will double again in the next thirty years, while the population decreased by 20 %, then the national income per capita is more than double. The PAYG system is a macroeconomic also be possible in the future. In order to achieve this, however, should be a fair share of labor to the productivity gains in the light of current declining wage share.

In Germany the Schröder government was established with the Riester pension a funded second pillar of the pension system during the first term.

In 2005, the statutory pension insurance in Germany received a grant in the amount of about 80 billion euros from tax revenues. This is explained by the coverage of the insurance-related services.