Pension policy over the past decade and a half has been characterized by an attempt to politically suppress the consequences of demographic change instead of dealing with them. It is therefore a great success of the Old Age Security Commission that its proposals also contain inconvenient benefit-reducing measures.
The linking of the standard retirement age to life expectancy and the abolition of the so-called pension at 63 should be highlighted because, contrary to all reason, they have not yet been able to achieve consensus. However, these measures are only the minimum for a sustainable reform of the pension insurance system. The real crucial question is how to share the burdens of demographic change, especially how to deal with the “bow wave” of the baby boomer cohorts.
At first glance, the Commission’s proposals appear to be a clever compromise towards a distribution of the demographic burden that is sustainable for all generations. The sustainability factor is to be tightened and the burden is not to be shared between pensioners and contributors at a ratio of 1:3 as previously planned, but now at a ratio of 1:2. This would actually effectively counteract the expansion of the pay-as-you-go system and the overburdening of future contributors. In order to avoid social hardship, the credit should be taken into account at the same time Pensions be adjusted to the basic security in old age (“free allowance”). Taken alone, the combination of these two measures is an impressive compromise. It would enable effective intergenerational burden sharing and finally resolve the paralyzing conflict of objectives between poverty prevention and intergenerational justice.
However, upon closer inspection, three other elements are crucial for the intergenerational distribution effect. Firstly, the inclusion of the self-employed in pension insurance, secondly, the introduction of a capital stock made up of additional contribution payments and thirdly, the introduction of a tax-financed transition factor.
Problematic inclusion of the self-employed
The inclusion of the self-employed in the levy process results in a windfall profit in the first decades. The demographic burden in pension insurance initially falls, but increases even more in the long term. This repeats the “original sin” of the introduction of today’s pay-as-you-go system in 1957 to pay out pensions after the loss of capital stock due to world wars and economic crises, which to this day ties us to an unprofitable pay-as-you-go system. Future generations would have to finance an even larger pension volume so that pensioners and contributors in the coming decades could be relieved.
This is in stark contrast to the goal of strengthening funded elements in old-age provision through the introduction of a “capital pension”. It improves the pension situation of future generations by creating profitable reserves to pay out future pensions. But the concept is not really new. It corresponds to the introduction of partial capitalization in 2001, the Riester pension; only that the capital stock should now be introduced in a mandatory and centralized manner. A consistent approach would not allocate the self-employed’s contribution payments to the levy – and thus consume them, but rather to the capital pension – and thus invest them.
Questionable holding on to the stop line
The Commission continues to stick to the pension level limit of 48 percent at the start of pension receipt. In the future, this level should be made possible by the “capital pension”. However, this will still be very low for those entering retirement over the next two decades. Therefore, when people retire in 2032, their pensions should be increased with tax financing so that a pension level of 48 percent is achieved. This approach is questionable because the Riester pension has long been a partial capitalization of the pension insurance. It was decided 25 years ago and brought about a reduction in pension levels via the so-called Riester staircase in order to give contributors financial space for private provision.
The contributors of the past 25 years have had both the means and the corresponding signals for private provision. The pension insurance report has consistently shown the pension level for new pensioners including the benefits from the Riester pension for years. For retirement in 2032 it would be 54.1 percent. Focusing on the pension level with statutory capital and Riester pensions would actually make the more stringent sustainability factor work equally for everyone and would not result in any further preference for age groups close to retirement.
Anyone who tightens the sustainability factor and at the same time promises that “neither for the pension portfolio nor for future pension additions” will a pension level “lower than under current law” be promised more intergenerational fairness without expecting anything from anyone within the system. The Old Age Security Commission is trying to square the pension circle. The result is not a real compromise between benefit recipients and contributors, but rather a shifting of the bill onto taxpayers and younger generations.
The reform catalog presented is a step in the right direction, but it remains caught in a fundamental contradiction. On the one hand, the Commission recognizes that old-age provision will have to rely more heavily on capital funding in the future and distribute the burdens of demographic change more fairly between generations. On the other hand, it proposes measures that would further expand the pay-as-you-go system and prevent the necessary adjustments within the system. Anyone who demands more capital coverage cannot simultaneously increase the levy. Anyone who promises more intergenerational equality cannot guarantee that no one will pay a price for it. This is precisely the squaring of the pension circle, which has caused German pension policy to fail for years.
