ISER Working Paper Series 2006-04
Occupational pensions, wages, and job mobility in Germany
01 Feb 2006
The role of firm pensions both for domestic and cross-border mobility is high on the agenda of the European Union. Workers covered by occupational pensions typically suffer losses in pension rights when changing employer. According to the European Council these losses are an obstacle to mobility and they reduce retirement incomes of multiple job holders (Council of the European Union 2003, 889). These concerns have motivated reforms in occupational pension scheme legislation over the last years in many EU countries, including Germany. Further reforms are currently under way. They generally aim at reducing the portability loss associated with leaving a pension scheme before retirement.
Several decades of research on labour mobility have established that turnover in jobs covered by occupational pensions is lower than in other jobs. The reasons for this are less clear. Occupational pensions may reduce mobility by imposing a capital loss on those who change jobs. Likewise, pension-covered workers often receive wage premiums which discourage mobility. These premiums may indicate that pension-covered jobs attract more productive workers. Finally, workers who prefer stable employment may sort into jobs covered by pensions and are thus unlikely to change employer. Research into these hypotheses has so far been supplied for the United States and the United Kingdom. However, there are few empirical studies of other European countries. The German case differs from the Anglo-American situation in that occupational pensions contribute considerably less to the retirement income of pensioners and a smaller proportion of workers are covered. This raises the question of whether mobility is affected by the smaller capital loss in Germany and whether less generous pension schemes have productivity effects similar to those triggered by the more generous schemes in the US and UK.
The paper provides evidence that occupational pension coverage in Germany deters voluntary job transitions by imposing a capital loss on both vested and non-vested early leavers. Furthermore, workers in pension-covered jobs receive a compensation which is about 10-12 % higher than in jobs not covered by pensions. Compensation premiums make mobility from pension jobs less attractive, and workers face less outside opportunities for better jobs. Finally, sorting of stability oriented workers into pension-covered jobs also plays a role in reducing mobility. This paper thus shows that the effects of occupational pensions on mobility do not differ substantively between Germany and the Anglo-American countries, despite the considerable differences in pension generosity. If compensation premiums are taken as evidence of the productivity effects of pensions, it is remarkable that comparatively small employer contributions into pension plans seem to have considerable productivity effects.
Regarding reforms in pension regulation the results show that decreasing vesting periods could be an effective policy option if the political aim was to enhance mobility. I find that reductions of the vesting period from 10 to 5 years should increase mobility in Germany by 8%. An indexation of preserved benefits (for vested early leavers) would have a larger impact, increasing mobility by 22%. However, these increases are from low initial mobility rates. Both shorter vesting periods and an indexation of benefits would also reduce retirement income losses of multiple job holders on defined benefit schemes. On the other hand, these policy options would place a considerable financial burden on firms. Moreover, this paper provides indirect evidence of the productivity effect of pensions which may result, for example, from higher firm investment into pension-covered worker's training. In light of the positive effects of high firm attachment the overall welfare and efficiency implications of the current reforms at EU level are therefore not at all clear.