German Pension Increase Draws Fire from Employers 

By Dave Graham; Stephen Nisbetuthor, Guardian.co.uk

April 8, 2008

Germany

Germany's cabinet on Tuesday backed a plan to raise state pensions by 1.1 percent this year and by as much as 2 percent in 2009, drawing an angry response from employers, who said the rise would cost jobs.

The proposed hike from July 1 meant older generations would be able to share in Germany's recent economic upswing, the Ministry for Labour and Social Affairs said.

No decision would be made on the pension rise for 2009 until next spring, but current models suggested an increase of around two percent should be possible, the ministry added.

Some economists have attacked the rise because it busts restrictions on pension increases set out in a formula adopted under previous Chancellor Gerhard Schroeder. Leading welfare lobbies said the sub-inflation increase was not big enough. Germany's EU-harmonised measure of annual inflation stood at 3.2 percent in March, according to a preliminary estimate.

The formula was devised to reduce strain on Germany's social security system caused by its ageing population.

Dieter Hundt, president of Germany's employers' federation (BDA), said it was wrong to break with the formula just because a general election was coming up in 2009.

"The consequence of this will be higher staffing costs for employers and less money in the pockets of workers," he said. "That's going to hit employment."
State pensions are funded by fixed levies split between workers and employers. If the population is stable but the workforce shrinks, the proportion of funding drawn from wages may have to rise to keep pension coffers filled.

The ministry said the divergence from the formula over the short term would be made good in 2012 and 2013.

The planned increases mean the contribution rate to statutory pension insurance will not be cut from 19.9 percent of gross wages until 2012, a year later than previously envisaged.

The pension rise means workers and employers must both shoulder a further 2.5 billion euros in costs in 2011, and 1.7 billion euros in 2012, the government said. The federal budget will be saddled with about an extra 2 billion euros in 2011.

Germany, with a population of nearly 82.5 million, has one of the lowest birth rates in the world. Studies have forecast the population could fall as low as 69 million by 2050. 

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