This paper discusses the consequences of population aging and a fundamental pen-
sion reform – that is, a shift towards more pre-funding – for capital markets in Germany. We
use a stylized closed-economy, overlapping-generations model to compare the effects of the
recent German pension reform with those of a more decisive reform that would freeze the cur-
rent pay-as-you-go contribution rate and thus result in a larger funded component of the pen-
sion system. We predict rates of return to capital under both reform scenarios over a long ho-
rizon, taking demographic projections as given. Our main finding is that the future decrease in
the rate of return is much smaller than often claimed in the public debate. Our simulations
show that the capital stock will decrease once the baby boom generations enter retirement
even if there were no fundamental pension reform. The corresponding decrease in the rate of
return, the direct effect of population aging, is around 0.7 percentage points. While the capital
market effects of the recent German pension reform are marginal, the rate of return to capital
would decrease by an additional 0.5 percentage points under the more decisive reform pro-
posal.
Dieser Eintrag ist Teil der Universitätsbibliographie.
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