By Bertrand Benoit, Financial Times

Germany

March 15, 2008 

The German government says it will raise state retirement benefits for 20m pensioners in a move to compensate consumers for rising food and energy prices.

The measure, which will cost the pension insurance scheme €1.2bn a year for the next two years, coincided with the fifth anniversary of Agenda 2010. Gerhard Schröder, the previous chancellor, designed the unpopular package of reforms in part to mend the depleted finances on the social security system.
Olaf Scholz, labour and social affairs minister, told journalists the government would suspend the application of a mathematical formula introduced by the previous government to put a cap on automatic pension increases indexed on average wages.

This will translate into a 1.1 per cent increase in pension payments as of next July instead of the planned 0.46 per cent. Pensioners have been badly hit by recent price increases and the rise will still be substantially below an expected 2.3 per cent rate of inflation this year.

The increase, the second in four years, will only soften the gradual erosion of pensioners' real disposable income. The government said the rise would be almost entirely financed from the reserves accumulated by state pension funds since the start of the economic recovery two years ago. The expected impact on the budget would be negligible at €150m, it said.

At 19.9 per cent of gross wages, pension insurance contributions are the highest of all taxes levied by the state to finance the country's social security system.

Economists have long been concerned about German consumers' reluctance to spend at a time when the economy's robust growth, which is largely carried by exports and capital goods investment, is under threat from a worldwide slowdown.

Dirk Schumacher, economist at Goldman Sachs, said the plunge in unemployment since the start of the recovery had not translated into rising disposable income because of inflation and spiralling tax and social security levies.

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