How sustainable pension reform can succeed – economy

Contribution of Axel Börsch-Supan, Friedrich Breyer and Klaus M. Schmidt

The three parties in the traffic light coalition want to sustainably modernize the country. They also include demographic change among the major challenges. It is therefore surprising that sustainability does not apply to the statutory pension insurance system, of all things: neither the level of pension nor the statutory retirement age should be affected.

The “age quotient”, that is to say the ratio between people of retirement age (over 65) and people of working age (20-64 years), will deteriorate drastically over the next 15 years. The entry of the baby boomer generation into retirement means that in a few years the baby boomers will no longer contribute to pension insurance, but will instead become retirees. If there are still around three people of working age versus one of retirement age, there will soon be only two. This is due on the one hand to the increase in life expectancy and on the other hand to the fact that the baby boomers have not provided enough descendants to finance their pensions.

A country that spends more than half of its federal budget on pensions is giving up its future

In a report by the Scientific Advisory Committee of the Federal Ministry of the Economy on the need for pension insurance reform, it is shown that the currently applicable rules and the “maintenance lines” (pension level not lower than 48 % of average salary, contribution rate no more than 20% and increase in the retirement age to 67 years or less by 2031) can only be maintained if the subsidies from the federal budget to the pension fund increase by 28 % currently (more than 100 billion euros per year) to 54% in 2045! A country that uses more than half of its federal budget to support retirees is giving up on its future. Because then there will be no more money for urgent investments in infrastructure, education and climate protection.

The continued increase in life expectancy is in itself a very positive development. However, we should not ask our children to finance the pension for these extra years themselves. The negative effects on pension insurance could be neutralized with a simple rule, if after 2031 the evolution of life expectancy is automatically distributed in a ratio of 2: 1 between working life and retirement, as is the proportion of working life (40 years) and retirement (20 years) roughly corresponds to this day. If life expectancy increases by one year, the retirement age will increase by eight months and the length of retirement by four months. If life expectancy does not continue to rise or even decline, as has happened in the United States in recent years, the retirement age would either remain stable or fall again. It is crucial that there is a clear and reliable rule that everyone can adapt to that does not have to be discussed every few years. This rule should be urgently resolved in the coming legislative period, so that those concerned can adapt to it. After all, those expected to retire in 2032 are now 56 years old.

In addition, the Advisory Council advocates greater flexibility in terms of effective retirement in the form of a “retirement window”. Some people would like to work longer but are prevented from doing so by the rigid retirement age, while others would like to retire earlier. Both must be possible, but must not be subsidized or punished. This is why it must be combined with actuarially neutral surcharges and deductions for later or earlier retirement.

The grand coalition has exacerbated the problem of election giveaways

The setting of the pension level at at least 48% announced in the scoping document is a flagrant violation of the principle of intergenerational equity, which is rightly important for parties in other policy areas – such as climate protection. A certain decrease in the level of pensions does not mean that the purchasing power of pensions should decrease. Poverty among the elderly also does not have to increase if the reform places a greater burden on high benefit recipients, who are often additionally covered by company pensions, home ownership or old-age insurance. private, than people with lower pensions. In the aforementioned report, the advisory committee proposed three options for financing long-term pension insurance while avoiding poverty among the elderly. On the one hand, we can apply the applicable law and, by means of the sustainability factor, impose on the two generations equally a moderate increase in the contribution rate and a moderate decrease in the level of pensions. On the other hand, the advisory board proposed two alternative models in which the stop line only applies to some of the pensions. One model protects the initial pension with a deduction line, but then updates pensions only with inflation, like in Austria. The second model protects smaller pensions more than larger ones. In all three options, the purchasing power of pensions would not decrease, they would only increase less than the average wage.

The only innovative element in the pension section of the scoping document is the intention to introduce partial funding within the statutory pension scheme. To this end, ten billion euros of federal funds financed by loans will be added to pension insurance once in 2022, which will then be invested in the stock market. Even if this bet on the rise in stock prices works, it will only marginally relieve pension insurance and only in the long term. In the short term, however, federal budget subsidies to pension insurance will increase dramatically, precisely when the debt brake kicks in and sustained high investment in infrastructure and climate protection will be needed.

The pension funding problem would be less serious if the grand coalition had done its homework over the past four years. Instead, he distributed benefits to the electorate with stop lines, maternal pensions, basic pensions and pensions from age 63, which made the problem worse. In this legislature, a lasting reform of statutory pension insurance must finally be addressed.

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