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Deficit Looms for German State Pension Scheme
By Jan Wagner, IPE.com
Germany
July 26, 2005
The state-run pay-as-you-go (PAYG) pension scheme is likely to face its first deficit in 20 years this September, according to pension experts. They ascribe this to dwindling revenues and the anticipated exhaustion of a sustainable reserve.
The scheme has been under pressure for several years as unemployment has soared to record levels, being estimated currently at 11.3% of the workforce, and wage increases have remained modest.
Meanwhile, the sustainable reserve, used to cover any short-term deficits in the scheme, has fallen to below €900m compared with €5bn in January and could be fully used up by September. Each month the scheme pays €15.8bn in benefits to Germany’s 20m state pensioners.
As a result, the scheme will face a deficit of €450m in September – its first since 1985, according to Franz Ruland, director of the German Association of Insurance Underwriters (VDR).
To close the deficit and ensure that benefits are paid, the finance ministry will have to provide the scheme with an advance on its annual subsidy, he said.
“The fact is that we are currently living from hand to mouth,” Ruland was quoted as telling the Handelsblatt business newspaper.
Germany’s parliament recently approved a government bill requiring employers to forward their share of the scheme’s payroll tax two weeks earlier than usual. The change will be implemented from January 2006. Pension experts estimate that this will add €400m in costs to German employers.
But Professor Bert Rürup, the government’s chief pension adviser, said the measure, along with other recent first pillar reforms, would not solve the scheme’s main problem, which he identified as falling revenues amid the erosion of Germany’s labour market.
Rürup said that the next government that comes into office after the September 18 federal election must raise the retirement age to 67 from 2010. Ruland agreed, saying “any government will have no choice but to do this”.
However, neither the governing Social Democrat and Green parties nor the Conservative opposition, which is expected to win the vote, have indicated in their party platforms that they back a raising of the retirement age.
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