German pensions 'face a shortfall of €9bn'

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German pensions 'face a shortfall of €9bn'

By Timo Pache in Berlin, Financial Times

October 8, 2003

Public pension funds in Germany face a financial deficit of up to €9bn ($10.6bn, £6.4bn) for 2003 and pension payments would have to be cut by about 1 per cent in 2004 to make up the shortfall, according to the industry body that represents the sector.

The warning, given by the Federation of German Pension Insurance Institutes in a memorandum to parliament obtained by FT Deutschland, comes as a number of big lobby groups announced their opposition even to a potential pension freeze next year.

Negative growth in pensions would be unprecedented in Germany.

A pensioners' lobby group is considering suing the German government if payment cuts materialize.

An alternative way of dealing with the projected shortfall might be to increase employee and employer pension contributions from 19.5 to 20.4 per cent of gross income.

Under the German pension system, which was established in the 19th century by Otto von Bismarck, the working population finances current pensions and money paid into the funds is immediately spent.

Public pension funds are legally required to retain a reserve of only 50 per cent of pension payments in any one month.

However, Ulla Schmidt, health and social security minister, promised recently that pension contributions would not rise.

The estimated €9bn deficit could rise, as it is based on income estimates in June.

The federation warned: "If pension contributions continue to fall at the same rate as in the previous two months, contribution rates will have to rise even higher."

Pension contributions have recently decreased because of high unemployment and falling net salaries.

Ms Schmidt is currently examining a range of rescue measures aimed at preventing a rise in contributions.

These include postponing the next scheduled rise in payments to pensioners, lowering the legally required pension funds reserve and paying pensions at the end rather than at the beginning of the month.

The situation could be made worse by finance minister Hans Eichel's plan to cut the yearly subsidy to the pension system by €2bn.

In total the pension system is subsidised by almost €80bn out of the state budget.

Yesterday a leading pensioners' lobby group warned the government of the political cost of cutting or failing to increase pensions.

"Pensioners would never forgive the politicians," the chairman said, adding that elderly people, in particular those on low pensions, would be unable to cope with a postponement in scheduled pension increases.