Pension Promises

Merkel Stamps Out Fuse on Pensions Time Bomb

Germany Merkel Seniors
Listening to voters, young and old. Source: AP

Chancellor Angela Merkel is known for her caution so the forcefulness with which she ruled out a future rise in the retirement age to 70 in Sunday’s TV election debate came as a surprise, especially after senior members of her own conservative party had been openly discussing it.

Confronting her Social Democrat challenger Martin Schulz who had claimed her Christian Democratic Union (CDU) party wanted people to go on working until they were 70, she said that statement was “simply wrong” and added: “We definitely won’t have to work until we’re 70.”

But that’s highly debatable. Senior members of her party including Finance Minister Wolfgang Schäuble have said they want to integrate rising life expectancy into the pension calculations, meaning that the retirement age will automatically increase from the current level of 67 for people born after 1964. And 70 leading members of the CDU’s youth wing, the Junge Union, have said they want to increase the retirement age step-by-step to 70.

“Merkel is blowing smoke by ruling out a retirement age of 70.”

Andrea Nahles, Social Democratic labor minister

Of course, promising people that they will have to go on working until they’re 70 is a surefire vote-loser, so Ms. Merkel wanted to quash any such notion in the remaining weeks before the election. But in doing so, she has exposed herself to criticism and opened up another battleground in what has been a tepid campaign so far.

“Merkel is blowing smoke by ruling out a retirement age of 70. I don’t trust it,” Labor Minister Andrea Nahles of the Social Democrats told business magazine WirtschaftsWoche, a sister publication of Handelsblatt. The chancellor, said Nahles, was refusing to address fundamental issues facing Germany’s ageing society.

“What does she want to do to stabilize the pension finances? Does she want to let pension levels slide, use more tax money or raise contributions? Those are the three options if the pension age rightly isn’t increased,” Ms. Nahles said. “As long as Merkel doesn’t answer this decisive question, her rejection of a pension age of 70 isn’t worth anything.”

Opinion polls said Ms. Merkel won Sunday’s debate against Mr. Schulz, and that she will most likely win a fourth term in the September 24 election. It’s far less clear, however, whether she will be able to go on sparing Germans painful welfare reforms.

03 p53 Pensions in Germany-01 contributions pay-out

While she has been preaching austerity to the rest of Europe, German social spending has quietly reached record levels under her leadership. Spending on pensions, nursing care and health care will rise above €1 trillion ($1.19 trillion) in 2021, according to a recent government report. By far, pensions make up the biggest share of the social budget, rising to €294 billion from €217 billion between 2000 and 2016. The prevailing opinion, at least among politicians from the ruling coalition of Ms. Merkel’s conservatives and the Social Democrats, is that Germany can afford it thanks to its buoyant growth and surging tax revenues.

That’s why her government has taken costly steps in recent years including the reduction in the retirement age to 63 from 65 for people who have paid into the system for 45 years, as well as an increase in the pension payout to mothers. That’s also why the social expenditure ratio – spending as a proportion of GDP – rose to 29.3 percent in 2016 from 29 percent in 2013, and will reach 29.8 percent this year. Those figures show that contrary to the government’s claims, social spending is not in sync with economic growth – it’s outpacing it.

Higher life expectancy has already extended the average length of pension payouts to 19.6 years compared with 1960 when it was just 10.6 years for women in West Germany and 9.6 years for men. And with demographic change, the number of people claiming pensions will rise inexorably, especially after 2030 when the baby-boomer generation reaches retirement age.

Not surprisingly, leading economists have criticized Ms. Merkel’s unusually unequivocal statement on pensions. “Ruling out retirement at 70 may be successful in terms of campaign tactics but it won’t be for Germany in the long-term,” Michael Hüther, head of the Cologne Institute for Economic Research, told Rheinische Post newspaper on Tuesday.

The head of the DIW German Institute for Economic Research, Marcel Fratzscher, told Südwestpresse newspaper: “Demographic change and increasing longevity make a later retirement age necessary. There’s no other way to finance the system.” The retirement age would have to reach 70 one day, he said, adding that there would have to be exemptions for people who were incapable of working that long.

DGB-Protest gegen Rente mit 67
A decade ago, German citizens demonstrated against rising the retirement age to 67, but parliament approved to change the law. It will become a reality by 2030. Source: Peer Grimm/dpa/lbn

Deputy Finance Minister Jens Spahn of Ms. Merkel’s CDU played down the pensions controversy. “In five to ten years, millions of people will voluntarily work longer because they want to continue having a task — and because the companies need them,” he told Handelsblatt, laying into the Social Democrats for saying his party wants to make people work until they’re 70. “The extent of lies and half-truths with which the SPD is waging its campaign has reached a level I’ve never experienced before. There is no CDU decision on a retirement age of 70.” The SPD, he added, was “desperate.”

The conservative campaign program says little about pensions apart from pledging to keep legislation unchanged until 2030 and setting up a panel of experts to make proposals for what should come then. The SPD, the opposition Greens and the Left Party, by contrast, want to keep the current pension level at 48 percent of net wages up to 2030 and cap pension contributions, currently at 18.7 percent of wages, at 22 percent. That will only be possible by diverting tax revenues into the state pension system.

Meanwhile, there are growing warnings that unless pension payments are prevented from falling further, the country will be plagued by old-age poverty that could even affect broad sections of the middle classes. Germany’s welfare system is funded by shared contributions paid by employers and employees. At present, workers pay 39.8 percent of their gross wages for pension, health, unemployment and nursing care insurance. If the country allows these welfare costs to rise, it will become less internationally competitive.

Critics see Ms. Merkel’s assurances on pensions as further evidence of her tactic of lulling voters into handing her a fourth term. But warnings that her government is failing to address pressing issues that are key to Germany’s economic future have so far failed to dent her poll ratings. Experts have accused her of lacking conviction when it comes to boosting investment in digital technologies and broadband infrastructure, areas where Germany urgently needs to raise its game if it wants to retain its industrial competitiveness.

Despite the economists’ warnings and the SPD’s sniping, the simple fact is that on pensions at least, the government really doesn’t need to take any immediate action. “In the coming parliamentary term, there is actually no need to raise the retirement age and not even in the term after that,” Axel Börsch-Supan, head of the Max Planck Institute for Social Law and Social Policy, told Süddeutsche Zeitung newspaper. “The financing of pensions is secured until 2030 through a mix of rising contributions and falling pension levels.”

By 2030, Ms. Merkel will be 76 and presumably past her retirement age. “If she doesn’t govern any longer than 2030, she won’t have to retract her statement,” said Peter Bofinger, a member of the Council of Economic Experts that advises the government.

But maybe, just maybe, the country will clamor for her to stay on.

 

David Crossland is an editor with Handelsblatt Global. Sven Afhüppe is Handelsblatt’s editor in chief. Martin Greive is a political editor with Handelsblatt. Max Haerder, Gregor Peter Schmitz and Elisabeth Niejahr are editors with WirtschaftsWoche. Peter Thelen from Handelsblatt contributed to this article. To contact the authors: afhueppe@handelsblatt.com and greive@handelsblatt.com

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