The faster the German population ages, the more difficult it will be for any incumbent government to implement measures to the detriment of the older and in favor of the younger generation – even if they could well be necessary from a purely economic point of view.
In addition, pensioners are the only group of people who can receive the “energy money” twice – once with their pension and a second time with their wages, provided the recipients earn something on top of their pension.
In addition, the coalition agreement not only contained the triviality that “a good and reliable pension is important for employees after many years of work”, but also the promise that “we will therefore strengthen the statutory pension and permanently secure the minimum pension level of 48 percent “.
However, it can be assumed that only a few of the politicians involved in the coalition negotiations – as well as the vast majority of those entitled to vote – know what the pension level is and, above all, what it is not. The pension level does not provide any information about how high the pension is compared to the last net salary before retirement.
In fact, this last salary is almost irrelevant for the individual pension amount. Because the pension level quantifies this ratio only for a fictitious employee who has drawn the respective average wage in 45 years of insurance.
The primary goal is not to depict poverty in old age
After deduction of the social security contributions, one speaks of the “net security level before taxes”. This is currently 48.1 percent of the current average wage. In the coming year, it is likely to drop to the current lower limit of 48 percent.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
The suggestive effect that a change in the calculation of the level of security can have is shown by the following example: If one were to assume an employment history of 47 years for the fictitious basic pensioner – which would be obvious in view of the target standard retirement age of 67 years – the pension level would rise by a good two percentage points without something would change in the payment amounts of the current pensions.
According to calculations by the Ifo Institute, the contribution rate would have to rise from today’s 18.6 percent to 25 percent in 2050 if – as promised – the pension level is to be maintained at the current 48 percent of the average wage. Alternatively, VAT would have to be increased from 19 to around 30 percent in order to be able to finance the immense federal subsidies. Neither seems likely today.
But even if the security level were permanently fixed at this 48 percent, this would not guarantee that the problem of poverty in old age, which is growing in eastern Germany in particular, would be tackled.
>> Read here: It is therefore still worth balancing the deductions in 2022
Unlike in most other OECD countries, the German pension system does not primarily aim to prevent poverty in old age; Rather, the pension should reflect and reward lifelong work performance. In short: those who have consistently paid high contributions throughout their working life will receive a high pension, while those with low contributions will receive a low pension. Because redistribution is not a task of the statutory pension insurance in Germany.
However, it is precisely those groups of people who are particularly at risk of poverty in old age who have not been employed for a long time or who have only worked part-time, such as the long-term unemployed, women and people with a migration background or without a qualification.
An increase in the pension level increases their pensions by the same percentage as those of long-term high earners – i.e. relatively little
(Photo: IMAGO/photothek)
An increase in the pension level increases their pensions by the same percentage as those of long-term high earners – i.e. relatively little. Poverty cannot be fought effectively in this way. In return, a falling level of security would in no way be accompanied by cuts in pensions. A decline in pension levels simply means that statutory pensions are increasing at a slower rate than wages.
Pensions in Austria and Switzerland: A look across the borders
A look beyond the borders shows that things can be done differently and better. In Austria, for example, pensions only increase by the rate of inflation, which is usually below wage growth, from a much higher starting base than in Germany.
The real purchasing power of pensions is preserved, but the individual replacement rate falls over time. In the US there is no universal pension level, but something like a pension level tariff. Individual income is taken into account to varying degrees when calculating the amount of the pension, depending on threshold values that are adjusted annually.
Switzerland does not use the term “pension level” either. The “old-age and survivors’ insurance” represents the basic provision there and guarantees a minimum pension of currently CHF 1,195.
In addition, there is an “income cap” from which the pension no longer increases, although contributions still have to be paid. This income limit is currently CHF 86,040 and limits the pension to CHF 2,390.
>> Read here: Unemployed shortly before retirement – you have these options
The pension payments for married couples are also capped, so that a married couple together cannot draw more than 150 percent of the maximum pension. In this way, the higher the contributory income, the lower the pension level is ensured.
So anyone who, like the Left Party, sees itself as the mouthpiece of the “small pensioners” should actually loudly demand “more Switzerland” instead of – in vain because it cannot be financed in the long term – a pension level of 53 percent.
reform necessary
In view of the demographic development of the statutory pension insurance, there are undoubtedly major challenges ahead, so that sooner or later politicians will not be able to avoid unpopular decisions.
A reform that is overdue would be an upgrading of low pensions and a relative flattening of high pensions, i.e. a departure from the equivalence principle established in 1957 – as is the case in 30 of 38 OECD countries.
This would certainly require a comprehensive political debate in Parliament and in public. After all, moving away from the principle of equivalence when setting the level of pensions would be a serious distribution policy decision.
More redistribution within the pension insurance would offer more opportunities to avoid poverty in old age within the insurance. It could thus become more future-proof because it is more flexible and adaptable.
The political hurdle for a long-planned cross-pillar pension information would be significantly lower. The existing individual entitlements to the statutory pension insurance and to one or more company and private supplementary pension schemes could be bundled in this.
>> Read here: More than half of the working population would like to retire early
Such a transparent and long-overdue individual overview of one’s own expected retirement income would be a good decision-making basis on which each individual could make their savings decisions.
Surveys show that most people today misjudge their expected retirement income. Moreover, such pension information in aggregated form would be a good basis for forthcoming political decisions.
In addition, a sustainable policy must think in long terms and not in terms of legislative periods. Because what may be sensible in terms of day-to-day politics and rational in terms of electoral tactics can turn out to be wrong in the long run. This risk is of course the price of a free democracy.
More: How pensioners with a part-time job can earn extra tax-free