On Tuesday, Germany celebrated the 125th anniversary of its pension system. Angela Merkel, the 60 year-old chancellor, lauded the country’s old age provisions. “The pension remains at the heart of our social system,” she said.
But even while the country celebrated its social security system that was designed to reward workers for a lifetime of hard slog with a comfortable and secure old age, the bell was tolling.
After her words of praise, Ms. Merkel also warned that the country’s state pension, in its current form, would not be enough for people to live on. She warned that the system needed a complete overhaul.
“The number of people who want to draw their pensions and get other state benefits is growing, while the group of people contributing to the pot is shrinking.”
An even starker warning came from Norbert Blüm, a fellow politician from the Christian Democrat party and former labor minister, who was responsible for a wide ranging reform of the pension system in 1992. “If the level of pensions keeps falling, it will wind up more like welfare. This doesn’t only damage the reputation of the pension system, but also undermines its protective role in society.” Without more reforms, he said, the idea of pensions as a social good is over.
Mr. Blüm is right to point out the falling value of pensions. In 1985, the average pension in West Germany was around 57 percent of the national average income. It will fall to 43 percent by 2030, as more and more baby boomers hit retirement age. Last year just over 800,000 new retirees drew a pension for thee first time. By 2031, this figure will go over 1 million.
“The statutory pension scheme only has legitimacy if it provides a basic safety net for most of the population,” warned Michael Hüther, president of the German Business Institute.
In the early 1990s, the German government cut the state pension payments, and encouraged workers to take out private retirement funds instead.
It partly worked.
Almost 88 million Germans have life insurance policies, most of which are designed to pay out on retirement, but interest rates are currently too low to make these products attractive. The guaranteed rate will be just 1.25 percent next year. Many people who have diligently paid into these funds will be disappointed with the amount they can withdraw.
This current coalition government has put yet more pressure on the system. It has reduced the age of retirement for some workers from 65 to 63. It has also expanded the number of stay-at-home mothers who can claim pensions. A previous reform gave women with children born after 1992 full pension rights for three of their years of maternity leave. The new set of reforms will allow those who had children before 1992 similar benefits: two of their years at home will count towards pension contributions.
All these reforms will put an extra €200 billion burden on the state pension system by 2030. Instead of easing the system, the coalition policies have put it under more stress.
At the moment, the pension program is still in reasonably good shape. It will end this year with a surplus of €1.8 billion and reserves of €33.5 billion, enough to pay out for 182 months. And despite the additional €200 billion costs, there is still potential to reduce pension contributions by 0.2 percent to 18.7 percent of gross income.
The government is in a comfortable position, for now, which may be why it has wasted months squabbling inconclusively about flexible pension models that could relieve the pressure on the pension system by making it easier for workers to work after the age of 67 if they want to.
But more action is needed, and soon.
The state pension pot is currently in such a strong state only because it is on a kind of “demographic holiday” as at the moment, the number of people who become eligible to draw a pension is matched by the number of pensioners who die. This balance has meant that last year, for example, the levels of pension expenditure rose by only 1.4 percent.
But this situation will soon change. The lower retirement age will cost the government €200 billion instead of the €160 billion the government had previously believed. It will also reduce pension payments in the future: something that will have a disproportionately high impact on people with lower pensions.
Workers on low incomes will be hit especially hard in the looming pension crisis, especially from 2025 when the baby boomer generation begins to retire. The number of people contributing to the pension pot will shrink by 8 million, and state payments are bound to fall. “The pension system will inevitably slide into crisis,” said Hans-Werner Sinn president of the prestigious Ifo Institute for Economics in Munich. “The number of people who want to draw their pensions and get other state benefits is growing, while the group of people contributing to the pot is shrinking.”
No government has yet come up with a proper calculation of what this means in terms of worker contributions and levels of state pension payouts, it is clear that either the contribution levels must rise over the current target of 22 percent of income for 2030 or the pension payout will have to drop lower than the expected 43 percent of income. This will leave many pensioners dependent on other state benefits, as their pension will simply not meet the cost of living. The threat of poverty in old age is growing stronger.
Peter Thelen is a reporter for Handelsblatt. He focuses on social security systems, the job market, as well as collective labor agreements and wage policies. To contact the author: firstname.lastname@example.org