Will the pension actually be secure again? The proposal, which the Federal Government’s Pension Commission agreed on last week, met with a surprising amount of approval. Chancellor Friedrich Merz and Social Affairs Minister Bärbel Bas said they wanted to fully implement the proposals. And even many experts praise the compromise. Retirement provision expert Axel Börsch-Supan from the Max Planck Institute in Munich criticizes the fact that there is still a limit for the pension level, below which it should not fall. But Lars Feld, who was once head of the economists and then personal advisor to Christian Lindner in his role as finance minister, praises the package: “The reform package solves the most pressing problems.”
“I almost feel like the 2006 World Cup team,” says commission member Peter Bofinger. The commission also achieved widespread approval by distributing the unreasonable demands in a balanced manner between the two sides with which it was staffed. Pension rebel Pascal Reddig was there for the CDU and left-wing party member Annika Klose for the SPD. The commission was headed by two politically not inexperienced experts, the chairwoman of the social advisory board, Constanze Janda, and the former head of the Federal Employment Agency, Frank-Jürgen Weise, who had already reorganized the administration of the unemployed there.
The SPD has to live with the fact that people should retire later. If Germans live three years longer, they should work two of them and enjoy one in retirement. In practical terms, this means that from 2041 onwards, Germans should retire six months later, i.e. at 67 years and six months, and then – depending on the development of life expectancy – it will probably be half a year later every ten years. In 2051 you would be 68 years old, in the 1990s you would retire at 70. This would then apply to the children who are currently in kindergarten.
Unreasonable demands for the SPD
The Commission is going even further by wanting to abolish early retirement. She doesn’t just want to delete the “pension at 63” without deductions, which was introduced in 2014 and which is now actually a pension at 64 years and eight months and is thus closer to the “pension at 65” that Franz Müntefering introduced from the start as part of the pension at 67: Anyone who has paid in for at least 45 years can retire earlier without deductions. Both, however, were not so much used by physically troubled low-income earners, about whose fate the SPD had always loudly complained. Instead, it was the solidly supported members of large German companies with stable employment relationships who benefited from the regulations.
The possibility of retiring early after 35 years of contributions will also be restricted: this will no longer be possible at the age of 63, as was currently the case, but in future only at the age of 64. (However, for years it has been possible to offset the corresponding pension deductions through voluntary contributions. Some insured persons have paid in mid-five-figure sums for this purpose. The Commission does not comment on what happens to these entitlements.)
In general, the idea from the SPD environment of making pensions dependent on the years of contributions was coldly rejected by the commission. Finally, according to the German system, pension points are also acquired with the years of contributions, which determine the amount of future old-age pensions, argues the Commission. In other words: If high-earning academics worked longer, they would receive even more pensions than they already do, while low-earners would be worse off if they retired earlier. An attempt to change that would violate the principle of equivalence established in Germany, “that equally high contributions lead to equally high pensions,” as the commission report states.
Unreasonable demands on the Union
On the other hand, the Union has also abandoned some principles. Mini-jobs, for example, which were previously subject to significantly simplified rules for taxes and duties, will largely be eliminated.
The Commission is also proposing a big step towards ensuring that all Germans pay into their pensions, regardless of how exactly they are employed. In the future, board members, members of parliament and, above all, the self-employed should also pay into the statutory pension if they are not already obliged to provide for their profession. This does not stabilize the pension permanently, because one day the new insured people also want to receive a pension for their contributions. In the meantime, however, the pension insurance company buys some breathing room at the expense of people who would perhaps have preferred to organize their own retirement provision because they hope for more returns. It is exactly the idea that Reich Chancellor Otto von Bismarck once had when introducing the pay-as-you-go pension: first collect contributions and give them to the pensioners.
This is also relevant when the Commission proposes to only transfer pension changes to civil servants, but not to include them in the statutory pension insurance. Public budgets have nothing to gain from this. The pension contributions of the new civil servants would only be a shift from the state budget to the pension fund. In addition, the federal and state governments would have to pay pensions for retirees as well as contributions for active civil servants for a transitional period.
The biggest compromise: the capital pension
All of this is made bearable for young people by perhaps the greatest compromise of all. The additional wage costs should first increase, not decrease – and the Chancellor even thinks that is “brilliant”. Because pension insurance is starting to save money for future pensioners and invest it in the capital market. To achieve this, pension contributions are to increase by half a percentage point from 2028 to 2031, half financed by employers and half by employees.
This was never a pet project of the SPD. Even in the traffic light coalition, the Greens and FDP had to wrest this project from the SPD, but in the end it didn’t happen. On the other hand, Friedrich Merz had often criticized the high labor costs in Germany (“we are no longer as much better as we are more expensive,” says industry president Peter Leibinger). This is justified by the fact that the reform package as a whole stabilizes contributions in the long term and, in the best case, even causes them to fall slightly.
Politicians occasionally express the hope that the capital could also be used to finance young growth companies in Germany. However, if you follow the Pension Commission’s suggestion, only a very small portion of the money saved can be used for this purpose. The Commission demands for the benefit of the insured: “The capital must be invested as widely as possible in order to balance out the return risks of individual investments, asset classes, sectors or countries.”
And what’s the point?
In fact, this is a package that most experts believe could last a while. “The measures will stabilize the system,” believes Peter Bofinger, who of course did not previously consider the pension to be terminally ill. His commission colleague Jörg Rocholl, President of the Berlin business school ESMT, is even more euphoric: The Commission’s proposal, “if fully implemented, will not only stabilize the pension system for decades, but will even significantly increase the pension level.” The Commission has set the goal that one day the pension should replace 70 percent of the old net salary – a figure close to the Austrian level that some pensioners and many populists like to swear by (although Austria still has significantly higher birth rates than Germany).
The calculations are a little different than before. Until now, the “pension level” of currently 48 percent was the benchmark that relates the standard pension of a fictitious “corner pensioner” to the average wage and therefore says little about the actual situation at retirement. In addition, it is calculated before taxes are deducted, so it ignores the fact that pensioners also have significantly fewer deductions in percentage terms than those in employment due to progression. This is also why the Commission prefers to measure the net replacement rate after taxes in the future.
Former Lindner advisor Lars Feld is not quite as optimistic as Commissioner Rocholl, but he also thinks: “If the package is fully implemented, it can last until 2040.”
The risks
However, Feld also warns: “Forecasts are always uncertain.” The fact that pensions held up comparatively well in the 1900s was also due to the fact that Germany’s economy was doing well, wages were rising and immigrants came to the country, filling vacancies and paying pension contributions. At times, every second job subject to social insurance contributions went to a foreigner, not always to refugees, but often to EU citizens from Eastern Europe. At the same time, local women also worked more and more. Both are wins that cannot be repeated. Pension expert Börsch-Supan points out the importance of economic growth, which is currently not looking good. Commissioner Rocholl is also aware: “The exact development of pension levels depends on many factors such as economic growth, immigration and capital market returns.”
In the future, the development of the capital markets will also come into play. However, there has been a lot of experience with crashes on the stock market over the past few decades, and these have not upset well-positioned stock-based pension plans. “The commission examined all of these factors intensively and therefore calculated various scenarios that give us confidence that the system will be stabilized even in a crash scenario on the capital market,” asserts Rocholl.
Then, above all, there remains a risk – one that also occurred in the 1900s. When things are going well in retirement, governments are always tempted to hand out new benefits. In 2010, pensions were more sustainable than they are today. The fact that it is now in poor condition despite the good decade was due to political decisions: the introduction of the pension at 63, the expansion of the mother’s pension and the decision to ignore demographics when determining pension payments. “It is important that short-term political interventions are avoided in the future,” says Rocholl. Feld becomes clearer: “There is a great temptation for politicians to use pension policy to get votes and then push through such nonsensical measures as mothers’ pensions.”
Paradoxically, this is the greatest risk to pension security: that it will now become so secure that future governments will make it insecure again.
