Squandered Opportunity

Changes to Pension Law Send Mixed Signals to Industry

  • Why it matters

    Why it matters

    After moving toward extending the length of working life to safeguard the level of prosperity in its aging society, Germany is now moving back to early retirement.

  • Facts

    Facts

    • The new reform allows full pension entitlement at age 63 after 45 years of contributions.
    • Starting in 2015, the burden to pension contributors from the new program will be €10 billion per year.
    • Germany has an ageing and shrinking society.
  • Audio

    Audio

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Chancellor Angela Merkel has won many friends with her compromise on early retirement at 63. Source: DPA
Chancellor Angela Merkel has won many friends with her compromise on early retirement at 63. Source: DPA

 

Germany is enjoying a sensational summer. The sun is shining, the economy is in good shape and, aside from a few problem industries, employees are profiting from long awaited wage increases. Never have so many people in Germany had a job. Seldom have tax and social coffers been fuller.

Even the Ukraine crisis, despite initial signs it might strain the economy, has not disturbed the overwhelming feeling that, at last, everything is going well in Germany. The Christian Democratic Union and Chancellor Angela Merkel have been the main beneficiaries with high ratings in opinion polls.

Unfortunately, this federal government has little to do with the prevailing feelings of elation. In fact, it is harvesting what former governments sowed, from the Hartz reforms (a commission led by Peter Hartz for former Chancellor Gerhard Schröder that developed an agenda to combat unemployment) to legislation that deregulated labor.

This government has decided to squander a large part of this bounty by dispensing feel-good largesse to the population at large – in particular, the pension package, which starting in 2015 will burden pension contributors to the tune of €10 billion ($13.39 billion) per year.

Andrea Nahles, minister of labor and social affairs, spins this latest proposal as being “earned, not donated,” something German citizens can enjoy without regret. But that’s not true of the core element in the package: full pension entitlement at age 63 after 45 years of contributions. The run on this new form of pension is being felt daily by the pension insurance fund, emphatic evidence that a calamitous signal has been sent by the federal government.

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