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

  • Pdf

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.

Anyone meeting the retirement requirements is being called stupid if he or she works even one day longer than necessary, which is creating problems for companies.

For a decade or more, Germany was moving toward extending the length of working life, to safeguard the level of prosperity in an ageing and shrinking society. Suddenly, now everything is pointing back to early retirement.

Anyone meeting the retirement requirements is being called stupid if he or she works even one day longer than necessary, which is creating problems for companies who want to retain an experienced, highly skilled employee who has reached retirement age. Other companies are using the new pension reform to rid themselves of older workers in a last wave of early retirement, even though now seems the right time to invest in jobs and flexible working models suitable for older employees along with training programs and in-house health facilities.

It’s not simply the half percent of lost growth the hemorrhaging of older employees will cost the economy, according to estimates from the Bundesbank, Germany’s central bank, but the long-term costs of the pension “gift” to consider.

In many companies, there has been a widespread attitude toward early retirement that only the good older employee was the one who had been pensioned off. Despite pious utterances to the contrary, this viewpoint is still widely held. Yet attitudes have been changing and more firms are warming to the idea of a longer work life. By declaring that workers can retire at age 63 under certain conditions, Berlin has blundered by sending mixed signals to business. This can only be remedied by a counter signal in the form of targeted government support for a longer working life.

With the “flexi-pension,” which allows employees to work beyond age 63 if they choose, the business wing of the CDU has already found the right name for this project and its coalition partner, the Social Democratic Party, is on board. What’s missing is the right content.

According to the law, which took effect July 1, a company may extend an employment contract with an employee as often as it wants beyond the legal age of retirement. For every year an employee works longer, the pension insurance fund pays an increased pension of 6 percent. So a first important step toward a flexi-pension has been taken.

A second step should make it easier for older employees to reduce working hours and claim a portion of their pension to make up for lost income, even beyond the legal age of retirement. This partial pension already exists, but it is rarely used because of strict limits on additional earnings. The coalition government should think carefully about options beyond flexible hours and consider, for example, dropping pension contributions for pensioners a company is employing. If this obligation disappeared, pensioners would become very reasonably priced employees.

Creating competition with younger employees can’t be the goal of these changes. Rather, they offer a better way to prevent poverty in old age by giving pensioners the right to pay contributions into the pension insurance fund, in addition to the employer’s contribution, and earn new pension entitlements.

The author is a Handelsblatt correspondent in Berlin. You can reach him at: thelen@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!