Unfair and expensive
This pension reform is a bad idea
A comment from Nadine Oberhuber
March 5, 2024, 9:43 a.m
Labor Minister Heil’s new pension package is not a rescue for the pension system. The reform costs a lot of money and puts a one-sided burden on younger people.
If the announcements by SPD Labor Minister Hubertus Heil remain true, then the planned pension reform will be a severe blow – firstly for all employees and secondly for the state budget. The government wants to stick to the so-called holding line of 48 percent for many years to come. This value should actually only apply until 2025 and then be reduced slightly, because otherwise the pension will no longer be able to be financed in the future when the baby boomers retire. Neither for the old, and certainly not for the young, at least that’s what all previous forecasts say.
The holding line was intended to stop the worst from happening because it defines the level below which the statutory pension should not fall: an employee who has paid into the statutory fund at an average level for 45 years should, in the year in which he or she retires retires, receive a monthly pension that is at least 48 percent of the then valid average earnings of all employees. So much for the technical definition. But it only sounds good at first that the government wants to stick to this 48 percent mark.
Because if it stays at 48 percent, instead of slightly lowering the pension level, as almost all pension experts unanimously recommend, the question must be seriously raised as to how the system should be financed in the future. And to clarify: A level of 45 percent would not mean that existing pensions – or pensions that will soon be paid out for the first time – would be reduced. It’s just that pensions will no longer rise every year in line with wages so that young people can still finance them. Recently, pensions have actually increased more than incomes; they have risen by 29.8 percent since 2012, while wages have only increased by 28 percent. Inflation ate away 24.6 percent of this.
Expensive reform
If the holding line remained, the state would have to spend around 35 billion euros additionally from 2035 – every year to pay the new pensions. This was calculated by the employer-related German Economic Institute (IW). This will mainly be financed by all workers and their employers because the contributions would have to be increased, which are deducted from gross salaries. And because that alone won’t be enough, the state would have to pump even more tax resources into the system than before.
The basic problem with the system is that the baby boomers are now retiring, meaning the number of pensioners will rise sharply by 2035. And fewer and fewer young contributors will have to finance their pensions in the future. That already means increasing expenses. With the old stopping lines, the reform of retirement income will be enormously expensive – and the young people will pay for it, almost single-handedly.
Is this what a generation-fair reform looks like, which several governments and parties of all stripes have been tinkering with for years? Hardly likely. Because employees would have to pay an additional 26.3 billion euros into the pension fund every year just so that the holding line of 48 percent can remain in place. The IW also determined these numbers. The contribution rate would rise to around 22.3 percent by 2035. It is currently 18.6 percent, which is shared equally between employers and employees.
Losses for employees
Converted to the account of a full-time average earner, this would mean: With a gross monthly income of 4,000 euros, he currently pays exactly 372 euros per month into the pension fund. In the future it would be 446 euros, i.e. 74 euros more than now. Over the year, that means 888 euros less in the account – which he then lacks for his own life and for saving for his own retirement. With a monthly gross of 6,000 euros, this comes to 1,332 euros annually. Which is pretty much exactly the amount that savers in this country put into private pension and fund savings plans every year.
Oh, that’s right, the government will soon also want to save money with shares in order to plug the impending hole in the statutory coffers. She wants to set up the “Generational Capital” foundation. Assuming that 12.5 billion euros flow in annually from government funds: with a 4 percent return (which can be assumed for a solid mix of stocks and bonds), around 195 billion euros would come together by 2035. Sounds enormous, but the state pot only generates 7.5 billion euros in interest and income annually to subsidize the statutory pension fund. This will perhaps slow down the increase in contributions for employees a tiny bit – but not prevent it.
And the moral of the story? If the government wants to preserve the ability of the younger population to make long-term provisions for old age, it should slightly reduce its promises to older people when it comes to pensions. Working voters should tell her that again when they get the chance.