Avoiding Old-Age Poverty in Times of Demographic Change: An Unconditional Basic Income Scheme for Pensioners within the German Statutory Pension Insurance

Due to pension reforms in the last decade, the problem of old-age poverty is back on the agenda of German social policy. To address this problem, tax-financed subsidies to stabilize the replacement ratio in the statutory pension system are being proposed by the German government. Due to the equivalence principle in the German pension system, pensioners benefit from this subsidy according to their individual life-time contributions. This raises the question whether these subsidies should rather be used to combat old-age poverty. In this paper, we propose an unconditional basic income for pensioners (UBP) additional to the contribution based system.

We simulate the current pension system and both reform proposals for Germany until the year 2060. Demographic development is projected using a Leslie matrix approach. The economic environment is projected via a Solow-Swan growth model. The labour market is modelled using the approach of Burniaux et al. (2004). Finally, the German Statutory Pension Insurance is modelled via a detailed computation of each cohort’s average earnings points in each year, and a projection of contribution rate and replacement ratio via the balanced budget requirement. For the distributive analysis, the cohorts’ earnings points accumulation is also modelled separately for different income brackets. This model is run in three different scenarios: the status quo, the government proposal, and our model of an old-age unconditional basic income. The UBP is designed to be fiscally equivalent to the government proposal.

Our results show that an unconditional basic income scheme for pensioners significantly reduces old-age poverty, whereas the government proposal mitigates the burden of demographic change mainly for medium and upper pension incomes. As a positive side effect, the UBP increases the internal rate of return of the pension system for low-income earners. However, compared to the status quo, both proposals require substantial additional tax-based subsidies.