Pension Reform

Cost of Social Safety Nets Set to Soar

  • Why it matters

    Why it matters

    A booming economy combined with all-time high employment have helped Germany’s extensive social benefits system run an overall surplus. But the surplus is eroding fast, and neither the demographic trends nor the reformed passed by the government will put a stop to this.

  • Facts

    Facts

    • The social insurance overall surpluss is expected to fall from €4 billion to €1.8 billion next year, despite record low unemployment numbers.
    • Former social democratic Chancellor Gerhard Schröder once declared that social insurance contributions should not exceed 40 percent of taxpayers’ gross incomes. But the German government has never been able to keep that ratio under this golden ratio for long.
    • Taxpayers pay on average almost 19 percent of their gross incomes in pension contributions. This might exceed 20 percent between 2020 and 2030, but state pensions are still rapidly decreasing.
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    Audio

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Bundestag zum Haushalt 2017
Labor minister Andrea Nahles is pushing for higher retirement contributions to counter sinking pensions after 2030. Source: Kay Nietfeld/DPA.

Here’s the good news on the decisions the German government reached on pension reform last week: Compared to the other social reforms that were implemented during the current legislative period, they are not very costly.

For example, the planned improvements for those unable to work due to disability will come into force in small steps by 2024. After that, they will cost the pension fund €3 billion ($3.18 billion) per year.

The conservative-led coalition has also decided to further stretch out the adjustment of pensions in eastern German states to levels in the western region. The adjustment process was supposed to be completed by 2021 at the latest. But it will now be achieved between 2018 and 2025, at a total cost of up to €3.9 billion to be spread over those seven years.

“By that point, eastern Germans’ pensions should probably catch up with  western Germans’ anyway,” said Joachim Ragnitz from the Ifo economic research institute, provided that wages in the east rise a little more than they do in the west in the future.

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