The German Pension The German Pension SystemSystem

By Christoph Wenzinger, Tom By Christoph Wenzinger, Tom Surgeon, Rebecca Hale, Surgeon, Rebecca Hale, Pierre-Emmanuel Leng and Pierre-Emmanuel Leng and Lizzie SimpsonLizzie Simpson

Pension System: HistoryPension System: History 1889: Invalidity and old-age insurance (Gesetzliche 1889: Invalidity and old-age insurance (Gesetzliche

Rentenversicherung, GRV)Rentenversicherung, GRV)

• 1.7% of wage, paid equally by employer and employee1.7% of wage, paid equally by employer and employee

1957: First big pension reform1957: First big pension reform

• Transition from „Kapitaldeckungsverfahren“ to „Umlageverfahren“ Transition from „Kapitaldeckungsverfahren“ to „Umlageverfahren“

• „„Kapitaldeckungsverfahren“: Contributions are accumulated Kapitaldeckungsverfahren“: Contributions are accumulated individual assets. Insurance payments are financed by contributions individual assets. Insurance payments are financed by contributions and interest on capital.and interest on capital.

• ““Umlageverfahren”: Contributions are not saved, but spent Umlageverfahren”: Contributions are not saved, but spent immediately on financing actual pensions. (Generationenvertrag / immediately on financing actual pensions. (Generationenvertrag / contract between generations)contract between generations)

• Key feature of the reform: adjustment of pensions to the general Key feature of the reform: adjustment of pensions to the general development of income (dynamische Rente / dynamic pension)development of income (dynamische Rente / dynamic pension)

Pension System: History IIPension System: History II

1992: lowering of pension payments1992: lowering of pension payments

2001: Introduction of the “Riester-Rente” 2001: Introduction of the “Riester-Rente” (Walter Riester, SPD)(Walter Riester, SPD) ((Amendment of the „Altersvermögensgesetz“ on 11 May Amendment of the „Altersvermögensgesetz“ on 11 May 20012001))

• In addition to the “Gesetzliche Rentenversicherung In addition to the “Gesetzliche Rentenversicherung (GRV)” that works according to the “Umlageverfahren”(GRV)” that works according to the “Umlageverfahren”

• Works according to the “Kapitaldeckungsverfahren”Works according to the “Kapitaldeckungsverfahren”

• Private retirement pension system, financial support Private retirement pension system, financial support from the state, voluntaryfrom the state, voluntary

What is a Pension?What is a Pension?

‘‘A regular payment that is intended to A regular payment that is intended to allow the saver to subsist without working allow the saver to subsist without working at a later point in his or her life.’at a later point in his or her life.’

Comparison between German and Comparison between German and English pension systemEnglish pension system

In England there are four common In England there are four common pension schemespension schemes

1)Personal pension1)Personal pension 2)Stakeholder pension2)Stakeholder pension 3)Company occupational pension3)Company occupational pension 4)Basic state pension (BSP)4)Basic state pension (BSP)

GermanyGermany

In Germany there is a Pay As You Go In Germany there is a Pay As You Go public pension systempublic pension system

Size of pension fund is derived from*Size of pension fund is derived from* *sum of accumulated earning points*sum of accumulated earning points *the adjustment factor*the adjustment factor *type of pension and its value*type of pension and its value

Statistics to show differences in Statistics to show differences in pensions for men and womenpensions for men and women

Under Schroeder’s governmentUnder Schroeder’s government

• Average man’s pension = €1015Average man’s pension = €1015

• Average woman’s pension = €508 Average woman’s pension = €508

• (in Western Germany)(in Western Germany)

Merkel’s Pension ReformMerkel’s Pension Reform

Induced by fewer workers having to Induced by fewer workers having to support more retired people. support more retired people.

People are living longer and birth People are living longer and birth rates are in declinerates are in decline

40% people between 55-65 years of 40% people between 55-65 years of age are still working-very low age are still working-very low percentage!percentage!

Action TakenAction Taken

Aim to raise pension age from 65 to Aim to raise pension age from 65 to 6767

Encourage employers to offer Encourage employers to offer defined contribution schemes.defined contribution schemes.

Ultimately hope to decrease the cost Ultimately hope to decrease the cost of the pension bill in an of the pension bill in an ‘economically struggling Germany.’‘economically struggling Germany.’

Schröders Government;Schröders Government;How pensions affected the peopleHow pensions affected the people

Schröder's government is credited with implementing Schröder's government is credited with implementing Agenda 2010; this agenda included the following; Agenda 2010; this agenda included the following; cuts in the social welfare system (national health cuts in the social welfare system (national health insurance, unemployment payments, pensions),insurance, unemployment payments, pensions),lowering taxeslowering taxesreforming regulations on employment and paymentreforming regulations on employment and payment

ConsequencesConsequences•After 2002; SPD lost support due to the ‘third way’ After 2002; SPD lost support due to the ‘third way’ combining the combining the ordoliberalordoliberal "social market" with neo- "social market" with neo-liberalism. liberalism. •It was considered by many people to be It was considered by many people to be dismantling of dismantling of the German welfare statethe German welfare state!! !! •High unemployment rate still remained a problem for High unemployment rate still remained a problem for GermanyGermany

Under Merkels GovernmentUnder Merkels Government……

Appointment of Merkel; ‘Appointment of Merkel; ‘the public was eager for the the public was eager for the government to get to work after six months of government to get to work after six months of political turmoil.’political turmoil.’

more pro-American outlook- similar pension system as more pro-American outlook- similar pension system as GermanyGermany

AIMSAIMS One measure taken; raising the top income tax rate One measure taken; raising the top income tax rate increasing a value-added tax from 16 to 19 per cent. increasing a value-added tax from 16 to 19 per cent. VAT increase is being put off till 2007 VAT increase is being put off till 2007 One problem; High labour costs One problem; High labour costs Economic investments e.g. increased parental leave Economic investments e.g. increased parental leave

benefits and research spending benefits and research spending Rise in retirement age to 67 and decrease in pensionsRise in retirement age to 67 and decrease in pensions Perusal of ‘trusting relations’ with United statesPerusal of ‘trusting relations’ with United states

And for the part-time And for the part-time workersworkers??

In In thethe EU EU

Part time employment = 18.5% of total Part time employment = 18.5% of total employment in Europeemployment in Europe

Netherlands, the United Kingdom, Sweden Netherlands, the United Kingdom, Sweden and Germany = highest levels of part-time and Germany = highest levels of part-time workingworking

More than 2/3 chose a part-time workMore than 2/3 chose a part-time work

A good opportunity for old peopleA good opportunity for old people

1984: Trading banking and Insurance 1984: Trading banking and Insurance Trade Union (Gewerkschaft Handel, Trade Union (Gewerkschaft Handel, Banken und Versicherungen, HBV)Banken und Versicherungen, HBV)

Part-timers must not be excluded from Part-timers must not be excluded from pensionpension

2000: 4th Euro Introduction Act (Euro–2000: 4th Euro Introduction Act (Euro–Einführungsgesetz)Einführungsgesetz)

block model with part-time working in old block model with part-time working in old ageage

A good opportunity for old people A good opportunity for old people (contd.)(contd.)

2003 Third and Fourth Acts for Modern 2003 Third and Fourth Acts for Modern Services on the Labour Market:Services on the Labour Market:

People can work older with part-time jobs People can work older with part-time jobs as on 1 July 2004as on 1 July 2004

2004 Old-age Pensions Insurance 2004 Old-age Pensions Insurance Sustainability Act:Sustainability Act:

Increase of the age limit to 63 between Increase of the age limit to 63 between 2006 and 20082006 and 2008

But not only for old peopleBut not only for old people

A lot of mothers are employed part-time A lot of mothers are employed part-time due to care of childrendue to care of children

Does not lead to unreasonable losses of Does not lead to unreasonable losses of pension entitlementspension entitlements

Conditions: Conditions: 1.1. Child is 10 years old maximumChild is 10 years old maximum2.2. Where nursing care is providedWhere nursing care is provided3.3. Special cases if more than 2 childrenSpecial cases if more than 2 children

If employee earns less than 155€If employee earns less than 155€

The Economy and PensionsThe Economy and Pensions

German Population getting older- but only work German Population getting older- but only work until 65- government stops receiving taxes and until 65- government stops receiving taxes and contributionscontributions

2050: Worker: Pensioner ratio 2:1, today 5:42050: Worker: Pensioner ratio 2:1, today 5:4

Schroeder: Agenda 2010: reform pension systemSchroeder: Agenda 2010: reform pension system

Need to discourage early retirement:Need to discourage early retirement: 50+ initiative50+ initiative

The Economy cont…The Economy cont… 2003- State pension deficit of €2.8billion2003- State pension deficit of €2.8billion

Increase contributions rather than reduce benefitsIncrease contributions rather than reduce benefits 2030- German market for private and 2030- German market for private and

occupational pensions- 5 times that of today- occupational pensions- 5 times that of today- €5trillion€5trillion

UnemploymentUnemployment 2003- 8.3%2003- 8.3% 2005- 11.6%2005- 11.6%

Annual Growth -0.1%Annual Growth -0.1% Predicated to be below 1% next yearPredicated to be below 1% next year

2003- €10billion shortfall in pension insurance 2003- €10billion shortfall in pension insurance systemsystem

Merkel Has Arrived…Merkel Has Arrived…

In order to deal with economic and In order to deal with economic and pension crisis…pension crisis…

Raise interest ratesRaise interest rates Increase VAT to 19% over next 2 Increase VAT to 19% over next 2

yearsyears Reduce level of unemploymentReduce level of unemployment Increase age of retirement to 67 Increase age of retirement to 67

(discourage early retirement)(discourage early retirement) Create employment for over Create employment for over

50’s50’s Increase contributionsIncrease contributions Encourage private pensionsEncourage private pensions

The Economy cont…The Economy cont… If these reforms not If these reforms not

enforced, pensions set to enforced, pensions set to account for 18% of GDP in account for 18% of GDP in near futurenear future

European level, Germany European level, Germany state pays relatively high state pays relatively high amount into pension amount into pension systemsystem

Predicted to rise by Predicted to rise by another 3%another 3%

CONCLUSION…CONCLUSION…

Current PAYG system needs to be Current PAYG system needs to be reformed otherwise the state will not reformed otherwise the state will not be able to fund itbe able to fund it

Need more uniformed systemNeed more uniformed system

Arrival of the new Chancellor- Angela Arrival of the new Chancellor- Angela Merkel gives rise to new hope for a Merkel gives rise to new hope for a swift and affective pension reformswift and affective pension reform