Pension Reform

A Ticking Time Bomb

  • Why it matters

    Why it matters

    Pension increases implemented and promised by Chancellor Angela Merkel’s coalition could entail higher-than-expected cost rises and boost labor costs.

  • Facts

    Facts

    • A new study seen by Handelsblatt shows the cost of the German government’s 2014 pension reform could be far greater than officially forecast.
    • The Cologne Institute for Economic Research estimates that a rise in pensions for mothers alone could cost contributors — employees and companies — more than €106 billion by 2030.
    • Further pension increases have been promised, for example an increase in eastern German pensions to western German levels by 2025.
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    Audio

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Germany is facing a looming pensions burden following reforms from 2014. Source: DPA

Germany’s ruling coalition of conservatives and center-left Social Democrats has placed a time bomb in Germany’s welfare system with generous pension increases that could cost the economy dearly.

Research seen by Handelsblatt indicates that the costs of a pension reform introduced in 2014 will exceed €100 billion, or $107 billion, in the years 2018 through 2030 — and political parties are lining up to promise further hikes in the campaign running up to the September general election.

Chancellor Angela Merkel’s government has been criticized for resting on the laurels of buoyant economic growth and failing to enact necessary cost-cutting reforms to equip Germany’s ageing society for coming costs.

In 2014, the government feted itself for pushing through the first pension reform in decades. It consisted mainly of two costly measures. The first was the so-called “mothers’ pension” that granted an increased payout to millions of mothers whose children were born before 1992. The second was to allow people to retire on a full pension at 63, provided they have worked for 45 years.

Employees and companies will face a significant rise in pension contributions, boosting non-wage labor costs and making Germany less attractive as a place to do business.

New research reveals just how costly those changes will be. Handelsblatt has obtained a study by the Cologne Institute for Economic Research showing that the mothers’ pension alone will cost more than €24 billion by the end of 2017 and €106 billion by 2030 — far more than the government has forecast.

The bill will be footed 50/50 by employees and their employers through social security contributions.

In its draft law, the government said the mothers’ pension would cost €6.7 billion per year but that was based on the unrealistic assumption that pension payouts won’t be increased. The new research factors in likely future pension increases and indicates how explosive the reform, driven by the Christian Social Union, the Bavarian sister party of Ms. Merkel’s Christian Democratic Union, could prove.

14 p05 Expensive Reform The Mothers Pension-01

The CSU is now pledging a further increase in the mothers’ pension. “Mothers deserve to have their contribution to the development of our society appreciated more than it has been,” said Emilia Müller, Bavaria’s welfare minister. She wants each of the 8 million mothers in Germany whose children were born before 1992 to get a further pension increase by €365 per year per child. That measure alone, the Cologne Institute has calculated, would increase the cost of the pension by almost €98 billion in the years 2018 through 2030.

It is harder to assess the cost of allowing people to retire on a full pension at the age of 63 if they’ve paid into the system for more than 45 years. The institute estimates that between 2014 and 2017, 925,400 people took early retirement, an abrupt jump compared with previous years that indicates many of them opted to retire early just because of the reform. The government’s estimate that the measure will cost close to €2 billion per year is “very optimistic,” said Jochen Pimpertz, a pensions analyst at the institute.

And that’s not all. The government has already decided to raise pensions in the former communist east of Germany to the level in western Germany by 2025. That will cost some €15.7 billion by 2024 of which the federal government will only fund €2.4 billion, with the rest being covered by pensions contributions.

If all the pension plans are implemented, employees and companies will face a significant rise in pension contributions, boosting non-wage labor costs and making Germany less attractive as a place to do business.

So far, meanwhile, the Social Democrats are the only party to have presented a plan to stabilize future pension payouts. Since 2000, the pension payout of a worker with statutory pension insurance who has paid into the system for 45 uninterrupted years has declined from 53 percent of average pre-tax wages to 48 percent. If Germany’s job market hadn’t boomed in recent years, the percentage would be even lower now, but it’s being kept afloat by an ever-increasing number of employees paying into the system.

Under the present system, the pension is officially estimated to fall to 41.7 percent of wages by 2045. The SPD wants to stop it falling below 46 percent, and it also wants to put a cap on pension insurance contributions. The aim is to boost public confidence in the stability of the pension system.

 

Peter Thelen covers politics and labor relations for Handelsblatt. To contact the author: thelen@handelsblatt.com

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