The plans to reform the statutory pension outlined in the exploratory protocol of the SPD, Greens and FDP are meager. Irrespective of the share pension propagated by the FDP, they essentially amount to “business as usual”, as the SPD has promised the voters in recent years.
In the exploratory protocol it says: “A good and reliable pension after many years of work is important for the employees.” The point is to create “good, independent protection for yourself with your own work”. “We will therefore strengthen the statutory pension and secure the minimum pension level of 48 percent. There will be no cuts in pensions and no increase in the statutory retirement age. “
The question of how these promises are to be financed becomes cryptic. In order to “stabilize the pension level and the pension contribution rate in the long term”, the coalition partners want to “get into a partial funding of the statutory pension insurance”.
To this end, the pension insurance is to receive in a “first step” ten billion euros from the federal government, with which the core of a capital stock is to be built up. In return, the FDP evidently renounced the crude idea of using two percentage points of the premium income to build up a share-based and thus profitable capital reserve, which would then be missing from the financing of the current pension.
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Now ten billion euros correspond to the expenditure of the statutory pension insurance of around eleven days. If it were possible to invest this one-off capital injection in such a way that it achieved a permanent five percent return, the pension contribution rate could not even fall by a tenth of a point with the income.
Which was not addressed in the exploratory protocol
It was not mentioned that our society will soon experience a massive aging surge, which will be an endurance test for the pay-as-you-go pension system. Less employed people will have to finance a growing number of retirees.
According to calculations by the Ifo Institute, the contribution rate would have to rise from 18.6 percent today to 25 percent in 2050 if – as promised – the pension level is to be kept at 48 percent of the average wage.
If one wanted to prevent this increase in contribution rates and instead finance the pension through higher federal subsidies, around 60 percent of the federal budget would have to be spent on pensions in 2050 – instead of the 30 percent today. If this contribution gap were to be financed through a higher value added tax, the normal rate would have to rise from 19 to around 30 percent in 2050.
To make matters worse, there will be a significant decline in trend growth as a result of aging and the falling labor supply. This will reduce the macroeconomic scope for distribution, and the competition for shares of tax revenue between the politically underestimated costs of decarbonization and the equally trivialized costs of coping with the aging surge will intensify significantly.
In addition, the risk of old-age poverty will increase in the medium term, especially in eastern Germany – regardless of whether the pension level is 44, 48 or even 53 percent. Because the pension level is a key figure that, contrary to popular opinion, says nothing about the ratio of one’s own pension to last net income.
Rather, it shows how high the ratio of the pension of the basic pensioner and the average wage is. The corner pensioner is a fictitious person who has paid contributions from the respective average wage for 45 years.
If one were to assume an employment history of 47 years for the corner pensioner – which would be obvious in view of the target retirement age of 67 years – the pension level would rise by two points without any change in the amounts of the current pensions.
Question the basic principle of the pension
However, many people in employment in East Germany have broken employment histories and will therefore only receive a small pension that is not sufficient to support themselves. The new basic pension is often of little help to them, as many do not have the required 33 years of insurance.
Against the background of the increased wage spread and the post-industrial labor market, it would be time to question a basic principle of pension insurance. So far, if you pay a lot of money into the insurance in a year, you will receive a higher pension than someone who pays lower contributions in the same year.
The annually accrued entitlements are added together and thus result in the lifelong pension entitlement. The idea behind this equivalence principle, which was established in 1957, is that the social status as measured by wages should be maintained during the working phase in retirement age. The pension insurance is not responsible for preventing old-age poverty, but the welfare state.
If more action is to be taken against poverty in old age in the future, a clever redistribution mechanism could be established within the statutory pension insurance system – following the Austrian model – without increasing the overall expenditure of the system on a sustainable basis.
To do this, the level of access pensions would have to be raised, and in return, the annual adjustments would no longer have to be linked to macroeconomic wage developments, but to the consistently flatter consumer price development. The purchasing power of pensions would thus remain constant; the pension recipients would no longer participate in productivity gains.
Such a pension formula would consistently favor the low-wage earner since, statistically speaking, they have a below-average life expectancy. At the same time, there would be an additional incentive for those with higher incomes to maintain their accustomed standard of living in old age through a funded supplementary pension.
This would not solve the demographic financing problems of the next 20 years. But the greater focus on poverty avoidance would strengthen the social acceptance of the “intergenerational contract”.
The state must promote private pension provision
It is undisputed that pension systems that rely on both pay-as-you-go financing and funded funding are more resilient and more productive in the long term than those that rely on only one source of funding in addition to tax subsidies.
It is therefore right that the state should promote compulsory private, funded old-age provision by offering a flexible and, above all, inexpensive instrument for everyone and, where appropriate, promoting private savings. It is irrelevant whether this is done under the codes “pension accounts”, “state funds”, “Germany” or “share pension”.
But it should also be clear that building up a capital stock is never free. Either current generations have to be burdened more so that future generations can draw on the income.
Or the state gets into debt and shifts the resulting financial burdens into the future. The idea that the state buys shares on credit and that the yield difference creates additional leeway to finance retirement benefits is nothing more than a bet that can work, but by no means has to be.
The pay-as-you-go state pension will undoubtedly face serious problems in the next 20 years – but it is not an obsolete model. With more courage to redistribute within the system and less dogmatism, this tried and tested, adaptable system can be made more future-proof.
A political and economic problem of pension policy is that for a sustainable policy one has to think in long periods of time, while politics thinks in terms of legislative periods. But what may seem sensible in terms of day-to-day politics and rational in terms of election tactics can prove to be wrong in the long term.
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