On the one hand, the principle advantage of PAYG pensions is superior with regard to the provision of insurance against inflation and investment risks (Alan Walker, 1999). Secondly, PAYG pensions are tend to be social inclusive, in other words, they can cover everyone even if you are unemployed for a moment. In contrast, you, as a beneficiary, cannot attend any funded pension if you are during a gap between employed and unemployed. To be specific, you should consider about your job change very carefully if you have a funded pension scheme e.g. DB pension and DC pension or you will suffer a lost during the unemployed time. That is to say, you can have more freedom in operating your pension money if you have a PAYG pension rather than DB or DC pension. In spite of PAYG pension, you can also achieve a free condition in operating pension funds by private pension; however, PAYG has a lower entrance requirement. On the other hand, PAYG pensions are fragile when they facing demographic changes and mounting rate of unemployment. Comparing to DB pension …show more content…
This part of the basic social security system. Both employees and employers should fund a percentage of salaries into this system. The scheme is based on the pay as you go model.
- 2nd pillar: Voluntary Occupational Pension Insurance. The Voluntary Occupational Pension schemes were created under the Company Pensions Law in 1974 and are a benefit granted by a company to its employees. Voluntary schemes can be divided into three kinds of categories: defined benefit, defined contribution, contribution with a minimum benefit.
- 3rd pillar: Private insurance. In addition to basic two pillars, individuals can use their own money to invest in some personal funded pensions. Furthermore, government has some subsidy plan to encourage civilians to save for retired life, e.g. Riester-Pension.
Annette Niederfranked (2013), from Germany Federal Ministry of Labour and Social Affairs, said, the most successful point in ten-year German pension reform is lower the percentage of pension costs in GDP to ten percent and the second is three pillar system change the civil pension perception that standard after-retirement life should rely on state pension. Although there are some drawbacks (e.g. strike), the effect of this reform cannot be ignored in helping Germany went through European debt crisis in