Pensions logjam

The Financial Times, February 18, 2001 

German workers looking forward to life as pampered pensioners, courtesy of the state, can rest easy - for the moment. The government's half-hearted attempt to reconcile a generous state pension with a rapidly ageing population has suffered another setback. 

The original plan was to trim the state pension, cap contributions and encourage employees to invest in supplementary private pension funds. The proposals were watered down in the face of opposition from the trade unions and the left, despite the valiant efforts of the Greens. Thus the value of the full pension will only fall from the current 70 per cent of the average net wage to 67 per cent by 2030, rather than to 64 per cent by 2020. 

On Friday, the Bundesrat, parliament's upper house, demanded further amendments to the package. The state governments, of all political hues, are worried that they will end up footing most of the bill for the private pension scheme. Employees will be offered direct subsidies and tax breaks, in the form of tax-free contributions, as an incentive to save. This will hit state as well as federal revenues. Regional governments are also expected to administer the new system. They want concessions. 

Some Christian Democrats believe the reforms are too complex and do not go far enough in cutting back the future costs of the state pension, but they support the principle of private pensions. Gerhard Schroder's government should therefore be able to strike a compromise, just as last year it bought off opposition to its package of tax cuts. 

A deal is essential. The modest pension cuts have already been approved by parliament. They are unlikely to be implemented without the supplementary pension. Employees must have an incentive to take out a supplementary pension as an alternative to comfortable state benefits. 

This pensions reform package, assuming it is passed without major adjustment, will shave little off future liabilities. But it will open the way for more changes. These should further prune the state pension and increase the allowances for tax-free contributions to private funds. The workforce participation rate should be improved, partly through a modest rise in the retirement age. 

Hans Eichel, the reform-minded finance minister, has his eye on the constitutional court. It is expected to rule later this year that both public and private sector workers should pay tax on pension benefits rather than contributions. This should be his cue for a more comprehensive round of reforms. 

Global Action on Aging
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