Berlin In order to alleviate the financial pressure on the statutory pension insurance, employees will have to work longer in the future. This is shown by simulation calculations published by the Bundesbank in its current monthly report. In the long term, raising the retirement age to 69 makes sense.
This would at least dampen the increase in contributions to pension insurance and the tax subsidy from the federal budget. Another possibility would be to decouple old-age benefits from wage developments, i.e. lowering the pension level.
The issue is politically sensitive, the traffic light coalition has ruled out a further increase in the retirement age, which will rise to 67 by the early 2030s. Economists and pension experts, on the other hand, recommend linking it to increasing life expectancy.
In April last year, the Scientific Advisory Board at the Federal Ministry of Economics had to listen to harsh criticism from Olaf Scholz, who was the SPD chancellor candidate at the time and is now Chancellor.
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The Bundesbank is not deterred by this. It is “overall understandable that a number of national and international advisory bodies recommend such a structure to Germany,” she writes in the monthly report. The pension fund and the federal budget would be overstrained if politicians fixed the retirement age permanently at 67 with life expectancy continuing to rise.
What scenarios are there?
The “double stop line” will still apply until 2025, the pension level must not fall below 48 percent and the contribution rate must not exceed 20 percent. According to current law, in the Bundesbank’s baseline scenario, the level of coverage would fall to 43 percent by the end of the 2030s and to around 40.45 percent by 2070. At the same time, the contribution rate will initially increase to 23 percent and then to 25 percent by 2070. Federal funds for the pension fund are also rising sharply – by around 1.5 percentage points in relation to value added.
Now the SPD, Greens and FDP have agreed to permanently stabilize the pension level at 48 percent. In this scenario, the contribution rate would even rise to 29 percent by 2070. There would be a significant additional burden on the federal budget. In order to be able to finance the increase in costs, the entire revenue from a standard VAT rate increased by six percentage points would then be required in 2070.
The situation is much more relaxed if the retirement age is not frozen, but increases with life expectancy – in such a way that the ratio of contribution years to pension years is fixed at the level reached at the beginning of the 2030s. In this case, according to the Bundesbank’s simulation, the retirement age would rise to 69 by 2070.
If the pension level stabilizes at 48 percent, the pension contribution rate in this scenario would rise to 27 percent by 2070. It would therefore be two percentage points lower than without adjusting the retirement age. The necessary federal funds are also increasing at a much slower rate.
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In a further simulation calculation, the Bundesbank also examines the case in which pensions no longer grow in step with wages, but only the increase in consumer prices is taken into account. This is how it is handled in Austria, for example.
With such inflation indexation, the pensions are decoupled from the wage development in the reference phase, which is reflected in a falling level of provision. Pensioners therefore no longer participate in the development of prosperity to the same extent as employees, but they do not have to fear cuts in their pensions either.
The Bundesbank does not want to give any specific recommendations for action
The Bundesbank assumes an annual increase in consumer prices of two percent and a gross wage increase of three percent. If one chooses a pension level of 48 percent for the year 2026, when the “double stop line” has expired, this would fall to a good 40 percent by 2070 with inflation indexing.
The pension level is a statistical figure that compares the pension benefits of a pensioner who has worked for 45 years at the average wage and retires at the statutory retirement age with the current average wage. On average, the pension level in this simulation would be 44 percent over an average pension period.
In this scenario, the pension contribution would increase to around 26.5 percent by 2070 – a good 2.5 percentage points less than if the pension level were fixed at 48 percent. The required federal funds would still increase significantly – by almost two percentage points of the value added.
The Bundesbank does not want to give a specific recommendation for action for the federal government. According to the monthly report, politicians must ultimately decide how they want to distribute the burden of demographics across the contribution rate, federal funds and pensions. “However, it should use long-term projections to explain in a transparent manner what effects the intended reform will have from today’s perspective based on plausible assumptions.”
More on this: Taxes for Senior Citizens – Those who earn extra have to pay