Why pensioners benefit from being guided by the wage level despite high inflation

Berlin The announced pension increase still falls short of the expected inflation, as the Ministry of Labor admits. Pensions will increase by 4.39 percent in western Germany and 5.86 percent in eastern Germany as of July 1st. However, should the inflation forecast of 6.0 percent from the Federal Government’s annual economic report come true in the current year, there is a risk of a loss of purchasing power for the third year in a row.

Because in the past two years, prices have risen faster than retirement benefits. In 2022, the pension adjustment of 5.35 percent in western Germany and 6.12 percent in the east was stronger than it had been in almost 40 years. However, the price increase was significantly higher at 7.9 percent on average for the year.

In 2021, prices rose relatively moderately at 3.1 percent. However, the west pensioners had to accept a zero round that year due to the low wage growth caused by the corona. In the east, pensions were only increased by 0.72 percent at the time.

So wouldn’t it be better to link the pension to the development of consumer prices instead of – as in Germany – to wages? In fact, many industrialized countries are taking this path, as explained by the OECD social expert Monika Queisser at an event organized by her organization on Tuesday.

Austria, for example, switched to price indexation in 2004 because the orientation towards wages had simply become too expensive for the pension fund. The pension commission set up by the then German federal government in 2018 also discussed a system change for a long time, but ultimately decided against it.

Retirees benefit from wage and productivity increases

In the long term, the orientation towards wages leads to significantly higher pension increases than price adjustments. This is due to the fact that, in addition to inflation, the development of labor income also includes the progress in productivity, from which the retirees also benefit.

The Ministry of Labor makes it clear that the current loss of purchasing power for retirees is “only a snapshot”. If you look back at the individual decades since 1960, then there was only a period between 2000 and 2010 in which the price increase eaten up the pension increase.

From 2010 to 2022, standard pensions rose by more than 32 percent in the west and by more than 47 percent in the east, according to the President of the German Pension Insurance Association (DRV), Gundula Roßbach. “The increase was thus significantly higher than the development of inflation in this period.” Consumer prices increased by around a quarter.

From the point of view of retirees, the adjustment of pensions to wage developments, introduced in Germany in 1957, has paid off. In addition, by 2025, pensions in this country will be increased more than wages if necessary, if the pension level otherwise threatens to fall below 48 percent.

Because the grand coalition had written this “stop line” into law until 2025 – and Federal Labor Minister Hubertus Heil (SPD) wants to make it permanent with his expected second pension package.

Other countries have raised pensions several times a year

In order to compensate for the currently high inflation rates, the industrialized countries have taken different paths. Countries that are based on consumer prices, such as Austria, France, Belgium or the USA, have made pension adjustments in some cases during the year.

Other countries have made one-off payments, such as the 300 euro energy price lump sum in Germany. Canada has given people over 75 a supplement to the basic pension, which is otherwise price-adjusted.

>> Read here: Pension insurance boss expects rising pensions and stable contributions

As the German Economic Institute (IW) found out in a study published in February, the currently high inflation rates are affecting pensioner households to the same extent as the general population. Looking at the past year, pensioner households with lower incomes were initially more heavily burdened than those with higher incomes. Towards the end of the year, however, the picture reversed.

The increase was thus significantly higher than the development of inflation in this period. Gundula Roßbach, President of the German Pension Insurance Association

While increases in the price of food and energy had a particularly strong impact on lower-income earners, the higher income retirees experienced proportionally more inflation in the areas of transport and leisure as well as entertainment and culture.

The type of heating also plays a role. Inflation hits pensioners with oil heating harder than pensioners with a district heating connection.

Expert advocates differentiated pension adjustments

OECD expert Queisser advocated that at least the neediest pensioners should be fully protected against the temporarily high inflation. It is also possible to demand a contribution from richer retirees – for example through lower pension adjustments above a certain income limit.

DRV expert Reinhold Thiede, who heads the research and development division for pension insurance, warned against simply upgrading low pensions in the face of high price increases in Germany. For many retirees, the statutory pension only accounts for part of their retirement income.

A flat-rate upgrade would mean, for example, that a pensioner who paid into the pension fund just a few years before becoming a civil servant and receives a correspondingly low statutory pension would receive support, even though he has his civil servant pension.

More: Euro inflation weakens – but core rate at record high

source site-11