|
|
German Lower House Backs Changes in Pension Taxation Rules
By Bloomberg
April 28, 2004
Germany's lower house of parliament approved plans to alter taxation rules for pensions, carrying out changes requested by the country's highest court two years ago.
The changes mean Germany will start taxing pension payouts from next year and, in return, phase out levies on workers' monthly contributions. The constitutional court ruled in March 2002 that existing laws unduly favor ordinary pensions over civil servants' benefits, which are already subject to taxation.
``It's a landmark step affecting current and future retirees,'' said Eva Vorbauer, who helps manage the equivalent of about $12 billion at HSBC Trinkaus Capital Management in Dusseldorf, Germany.
Today's decision is the second affecting pensions German lawmakers have taken in two months as the pay-as-you-go pension system faces the dual burden of rising life expectancy and a shrinking workforce. Parliament last month approved cuts in state pension benefits and a lengthening of the contribution period in a bid to ease the budget deficit and trim welfare costs.
The bill seeks to make contributions by companies and workers to life-insurance policies tax-free in stages by 2025. Current rules under which pension payouts are tax-free will be reversed by 2040. The opposition Christian Democratic Union, which controls the upper house of parliament, has pledged not to block passage of the legislation when it reaches the chamber.
Spending on pensions is rising faster than any other area of government expenditure, with a third of Chancellor Gerhard Schroeder's 251 billion-euro ($297 billion) federal budget going to top up the pension fund this year.
Labor Costs
Companies' and workers' joint pension outlays, at 19.5 percent of gross pay, help keep German labor costs above those in the U.S., U.K. or Japan, deterring companies from hiring, the Cologne-based IW economic institute has said.
The change to pension law is ``a de facto tax reduction,'' leading in stages to an annual reduction in the tax burden of 20 billion euros, Finance Minister Hans Eichel said in a speech to parliament. Taxation of pension payments will only partly compensate for the tax break, he said. ``That's a hard decision to make for a finance minister.''
The tax break, yearly adding about 1 billion euros annually to net income, ``raises the scope for private pension provision,'' Eichel said.
The bill also seeks to scrap tax breaks on life-insurance contracts signed from Jan. 1, 2005. Under current rules, savings from life-insurance plans are tax-free if payments continue for at least five years.
Criticism
Germany's GDV insurers' association, representing the country's more than 100 life insurers, criticized today's measures, saying they will undermine the attractiveness of life- insurance plans as an investment.
Tax subsidies have made life-insurance policies a popular form of retirement savings in Europe's biggest economy. Life insurers including Allianz Leben and Munich Re manage more than 90 million life-insurance contracts, together worth more than 2 trillion euros, the GDV said.
``It's gross discrimination against life-insurance plans,'' said Siegfried Brockmann, the GDV's spokesman, in an interview. ``This contradicts Schroeder's call for people to invest in private pensions. How else do you want to ease the burden on state finances?''
Other changes approved today affect private pension insurance or bank savings plans that qualify for state-backed tax breaks. The so-called Riester pensions, named for former Labor Minister Walter Riester, were launched two years ago to help reduce reliance on state retirement insurance.
Equal Treatment
Insurers must offer uniform rates to women and men in contracts from 2006. Given women's longer life expectancy, men pay and average of 15 percent less per month into state-backed private pension contracts, the GDV said.
``This could deal a blow to Riester pensions; men may start looking for alternative savings plans,'' Brockmann said. Since the government started granting tax breaks and subsidies for private pensions two years ago, the number of contracts has risen, reaching 3.1 million by the end of 2003. Insurers had initially hoped to sign more than 10 million contracts in the first two years.
|
|
