German Pension System Plan

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German Pension System Plan
Increases Burden on Retirees

ASSOCIATED PRESS, The Wall Street Journal

October 20, 2003

Chancellor Gerhard Schroeder's cabinet announced its proposal to shore up Germany's cash-strapped pension system Sunday, putting a greater burden on retirees while trying to encourage economic growth by keeping employer contributions level.

"It was certainly one of the most difficult discussions and one of the most difficult decisions that we have had to make in our time in office," Mr. Schroeder said after the five-hour meeting.

At the heart of the discussions was how to deal with an estimated €10 billion ($11.6 billion) shortfall in the state pension-insurance system resulting from fewer people contributing to the system and a planned cut in government funding for it.

The proposal, which still has to be approved by Parliament, where the opposition has already vowed a fight, comes as Mr. Schroeder's government battles a sluggish economy and an unemployment rate stuck above 10%.

The chancellor has been pushing a package that includes tax cuts and welfare overhaul that he wants in place by year end. He has threatened to resign if it doesn't go through. On Friday German lawmakers approved a €15.5 billion tax cut and reduction in jobless benefits.

As part of the savings package worked out between Mr. Schroeder's Social Democrats and its junior partner, the Greens, the cabinet proposed scaling back the planned €2 billion cut to the system in 2004 to €1 billion, then moving it back to €2 billion by 2006, Mr. Schroeder said.

The proposal would shrink the pension reserve fund, and do away with planned pension increases in 2004. There are likely to be cuts to pension increases in 2005 as well, but they weren't specifically defined.

Another part of the savings package will have retirees pay the full cost of nursing-care insurance, instead of half the cost that they pay now.

The cabinet discussed a long-term solution of raising the retirement age to 67, phased in from 2011 to 2035. Mr. Schroeder left the question open, saying such a move wouldn't need to be decided before 2010.

The package calls for the payroll levy to remain at 19.5%, half being paid by employers and half by employees -- already pushed up from 19.1% at the beginning of the year. Experts had worried it may have had to go as high as 20.5% if the funding hole wasn't plugged by other means.