The allocation procedure is special a method for the financing of social security, the age precaution, in addition, of health insurance and unemployment insurance. The deposited contributions are consulted directly for the financing of the furnished achievements, whereby by the insurer to small extent reserves can be formed (e.g. Fluctuation reserve of the legal old age pension insurance). For his payment of fees the contribution payer acquires a requirement on achievement in the case of the needyness (unemployment, illness, age). Saved in contrast to the allocation procedure will paid interest on with the capital covering procedure the contributions and, in order in the case of achievement (e.g. with entrance into the retirement) to be disbursed; often here for everyone insured an own account opened.

Characteristics of the allocation procedure

Some fundamental characteristics of the allocation procedure are briefly outlined by the example of the age safety device. Accepted, the payments of dues in each period will retain percentage of the wages during this period of the employed persons persons as fixer. From these payments of fees the pension achievements for during this period the persons in the retirement are financed. In a pure distribution system the entire contribution revenues must agree with the entire pension payments in each period:

Payments of dues in period t = achievements in period t.

If one subordinates that all contribution payers and all recipients of services are identical, then one keeps the following budget identity of an allocation procedure formal:

(1) Z_t w_t \ tau=E_t b_t

whereby the following notation is agreed upon:

• Z_t = number of the contribution payers in period t
• E_t = number of the contribution receivers in period t
• w_t = wage rate in period t
• \ rope = rate of contribution
• b_t = unit pension in period t

In the reality any deficits can be financed by transfers from the general tax revenue (fluctuation reserve in Germany, also by the eco-tax).

Net yield

(Average) the net yield of an allocation procedure for a participating individual is calculated by the relationship of the received achievements to the deposited contributions:

Net yield = \ frac {bar value of the achievements} {bar value of the contributions} -1.

Since over the budget identity of the allocation procedure the achievements correspond to the contributions of the subsequent period, the net yield of the allocation procedure corresponds to the growth rate of the contributions on the average.

The average net yield on the deposits into an allocation procedure can be computed exemplary also for equation (1). It is assumed that an individual is in one period t contribution payer and in the period t+1 recipient of services following on it (i.a.W., the length of the working life agrees with the length of the pension time). An individual pays thus the amount w_t \ to rope and gets a pension in the height b_ {t+1}. The resulting net yield is:

(2) \ frac {b_ {t+1} - w_t \ rope} {w_t \ rope} = \ frac {(Z_ {t+1} w_ {t+1} \ rope) /E_ {t+1}} {w_t \ rope} - 1= (1+n) (1+p) - 1 \ approx n+p

whereby the following notation is used:

• n = growth rate of the population
• p = growth rate of the wage rate

Hereunder applies: E_ {t+1} =Z_t, w_ {t+1} =w_t (1+p), E_ {t+1} =E_t (1-n) and b_ {t+1} = \ frac {Z_ {t+1} w_ {t+1} \ rope} {E_ {t+1}}

Since the product NP can be numerically neglected, the net yield can be approximated through n+p. In a "“matured"” distribution system thereby the contribution net yield is equal to the sum made of wage and population growth. This result was shown first by Aaron (1966). Thus the net yield of reallocation-financed systems sinks, if the population growth sinks or negatively and/or the wage rate increases will small fail.

Initial at the beginning of

In an allocation procedure the first generation receives achievements from pensioners, without for it (to call-worth extent) payments of dues to have paid ("“case of wind gains"”). This also as "“unfunded liability"” (uncovered commitment) designated gift must of all following generations be carried. If a payment by instalments of this initial debt does not take place, then grows the amount with a growth rate, which corresponds to the net yield on the payments of dues. Those is clarified by a simple example: The first generation t von Rentnern receives total transfers at a value of 100, which are financed by the persons employed the same period. These contribution payers expect a transfer at a value of 100* (1+ in the subsequent period (n+p)), which is then likewise financed by the persons employed, thereupon in period 3 a transfer at a value of 100* (1+ (n+p))^2. Thus the initial debt of 100 after x generations a value of 100* (1+ becomes (n+p))^ {x-1} reached. Accordingly will a system change more kostenspieliger, the system becomes the older. In the hypothetical case of a "“last"” generation, which has no more children, this generation would have to finance the costs of their own and the retirement of the predecessor generation.

Change of system parameters

The effect of demographic changes on the allocation procedure can be clarified by a conversion of equation (1):

\ tau= \ frac {E_t} {Z_t} \ frac {b_t} {w_t}.

This formulation determines the budget-compensatory rate of contribution, if a desired pension height is given. The expression

\ frac {E_t} {Z_t}

for each contribution payer (also age dependence quotient, age load quotient or old age dependency ratio mentioned) corresponds to the number of recipients of services, the expression

\ frac {b_t} {w_t}

the relationship from (average) amount of pension to (average) wage rate (the wage replacement rate).

If now the system experiences financial pressure, in principle the following options offer themselves to re-establish the budget identity:

• Increase of the rate of contribution \ rope
• Lowering of the wage replacement rate (essentially only by lowering of the average pension possible)
• Lowering of the age load quotient (essentially only by an increase of the life work time possible, i.e. later pension entrance)

Allocation procedure in practice

Situation in Germany

In Germany the allocation procedure is used with the social security (pension, legal ill, unemployed person and accident as well as the nursing care insurance). The height of the contributions depends global on the costs of the furnished achievements, whereby however income-oriented calculation guidelines are to guarantee that the individual contribution load does not exceed a certain measure. On the other side there are also contribution lower bounds (in the year 2005 e.g. approx. 260 EUR monthly as minimum contribution for the legal health insurance).

Old age pension insurance by the generation contract

In Germany the allocation procedure was implemented 1957 by Konrad Adenauer for the full pension at a value of 70% of the last gross wage. There was a principal savings pension before. The theoretical basis for the introduction of the allocation procedure ("§ 153 SGB VI) supplied the political economist and representative of the catholic social teachings Wilfrid writer (1904-1975) with its work "“security of economic position to the industriellen society"”. He spoke there of a "“solvent acre contract between in each case two generations"”. However writer concept of the generation contract was not completely converted by Adenauer. This had planned a broader financial basis by inclusion of self-employed persons and independent ones as well as the mechanism of a "“child and a youth pension"”.

Allocation procedure in other countries

• The USA, applied during the national old age pension insurance Social Security
• Switzerland, applied in the first column three of the column system
• Japan

Problems in the financing of the allocation procedures

Due to rising costs in the health service, increasing life expectancy and concomitantly increasing care costs with incomes breaking in at the same time because of demographic shifts (sinking birth rate, obsolescence of the society), sinking wage ratio, mass unemployment as well as insurance-strange withdrawals and economic crises in many industrial nations the financing of the social security is questioned by allocation procedures increasingly. In Germany during the first legislative period of the government was tried to establish a principal second column of the old age pension insurance (Riester pension). At present (2005) the old age pension insurances in Germany receive a subsidy at a value of approximately 80 billion euro from tax proceeds due to not sufficient means of the distribution system.

Literature and left

• Aaron, H. (1966). The social insurance paradoxically. Canadian journal OF Economics and Political Science 32 (3), 371-374.
• Social Security administration (the USA). Social Security Programs around the world

See also: Pension problem, Mackenroth thesis

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