Pensions Sink with Workforce

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Pensions Sink with Workforce

By Elise Kissling, FAZ.net

March 12, 2004

The German parliament on Thursday passed a modified version of legislation that will radically change the way national pension benefits are calculated.

In the future, the level of retirement benefits will depend on the size of the workforce in relationship to the number of retirees. Pensions will automatically decline as the German population shrinks over the next 25 years.

The government hopes the legislation will keep payments into the pay-as-you-go national pension system below 22 percent of gross wages in 25 years when there will be just over two workers to support each retired person.

Today, the working population is still four times as large as the number of retirees. But a very low fertility rate of 1.3 children per woman and a rapid rise in life expectancy mean that Germany will experience a particularly dramatic change in the age structure over the next 30 years.

Employees pay 19.5 percent of their gross salary into the system, which costs almost 12 percent of gross domestic product. That is 2.5 times as much as the U.S. Social Security system. But in contrast to other state pension plans, Germany's system offers a high level of retirement income based on a person's earnings history.

A last-minute concession made to the left-wing of Chancellor Gerhard Schröder's Social Democratic Party has put the goal of keeping pension pay-outs in line with contributions to the system out of reach. It would prevent the government from reducing the average pension rate for a person with 45 years in the labor force to below 46 percent of net wages.
“It's nonsense. In all likelihood, we know that 46 percent of net income will be incompatible with a rate of 22 percent,“ said Axel Börsch-Supan, the director of MEA research institute, who played a key role in working out the new calculation method. “It would work if you increased the retirement age by two-and-a-half years. But the crew of people that wants to keep benefits at 46 percent is also against increasing the retirement age.”

Model calculations show that the new law would cause the average pension level to fall to 43 percent of a worker's last net income after taxes from today's 53 percent.

Anticipating this problem, the legislation foresees a review of the pension system in 2008. This will allow the government to raise the retirement age to keep the system from collapsing.

This would be the fifth pension reform since 1992. The current legislation is the SPD/Greens government's second attempt to make the system fit for the rapidly growing ranks of elderly Germans. In 2001, the government introduced legislation on subsidized private pension savings, known as the third pillar after state pensions and company pensions.

But so far, few workers have taken advantage of these supplementary pensions. Calculations show the average worker would spend 26 percent of his or her gross wages or salary on retirement plans in 2030 when state pensions and private savings are added together.