The Debate about the Pension Reform

By Irina Becker

1. The Government Pension Scheme

The German pension system has already been implemented by Bismarck in the 19^th century.

While all employees have to be insured compulsorily, self-employed and partionally employed have the opportunity to insure themselves voluntarily. The financing works by a system of distribution, whereby workers and employers each pay half of the State-fixed contributions of 20.3 % into the governmental pension funds from which the current pensions get paid out directly.

The relatively small reserves of the insureres serve as a so-called fluctuation reserve ("Schwankungsreserve"), which ensures that even in months with temporary lower contributions there will not be a cash-flow problem.

Government contributes tax-financed additional payments.

The government pension scheme is based on the "Contract between Generations": the active wage-earning population has to finance the pensions of the retired ones, i.e. their parents. Later on, they as well will become dependent on the next generation, their "children", again will ensure the pensions of the older generation, and so on...

2. Structural problems of the current pension system in Germany

The government pension scheme in Germany is called "dynamic pension" or "productivity pension". This means, the pension level has to follow the wages and therefore also depends on the productivity of the national economy. This seems to be a great institution for everybody- provided that wages increase and the number of pensioners is limited. But nowadays, demographic development thwarts the plans: birth-rate drops, while simultaneously life expectancy increases – means that less employees have to finance more and more pensioners, many of whom have chosen the opportunity of early retirement or received old-age pension because of unemployment. Meanwhile wages are stagnating and jobs are getting cut.

The unemployed are not only missed as contribution payers, but also cause additional burden to the already very high labour costs. This again means higher contribution burdens to employees, employers and the State.

According to forecasts, there will be one pensioner for each wage-earner in the year 2030.

The additional payments of the government have to be extended every year (in 1998: 96,1 billion DM) and the annual Federal budget deficit increases.

Facing these severe facts and the threatening cost collapse, radical measures should have been taken. The Kohl government showed itself contented by some smaller structural adjustments for cost cutting, see for example the pension reform of 1992. Its most important innovation was that pension development no longer followed the gross income but the net income of the wage-earners. The pension formula was now constructed in a way that the net income of the pensioners amounted to about 70% of the average net income of the active wage-earners.

Furthermore, the additional payments of the government to the pension scheme were increased.

Another means of cost cutting was the implementation of the Law for Promotion of Growth and Employment ("Wachstums- und Beschäftigungsgesetz") at the end of 1996. Its main content were steps to raise the early retirement ages.

The perspectives for the young working population actually are far from being attractive: during working life, on the one hand, one has to pay high contributions to the social system, on the other hand one can expect a radical reduction in his standard of living when retired.

3. The 1999 Reform of the Pension System

The demographic and economic development, high unemployment rates and many payments taken out of the pension funds for so-called "non-pension-related payments"("versicherungsfremde Leistungen") let the rate of contribution rise above the magic level of 20% in the beginning of 1997. These costs combined with transfer payments to the Neue Bundesländer, as a consequence of the taking over of the former GDR pension scheme (between 1992-1997:75 billion DM), exhausted all pension reserves and further savings had to follow. After heavy debates by all parties, the Kohl government was able to implement another pension reform, which was passed by the Bundestag on the 11^th December, 1997. The law should have come into effect in the year 1999.

Its main contents were:

• A reduction of the long-term pension level from 70% to 64%.
• Considerable changes in pensions due to incapacity.
• Better compensation for the upbringing of children.
• Every pension which starts before the completed 60^th year of life will be reduced by 10.8%.
• The old-age limit and its pension implications shall be raised in steps to 65 years.
• Changes in the old-age pensions of women after unemployment or old-age part-time work.

In order to be able to lower the contributions of both employee and employer to the pension scheme, the government made an additional payment and financed this step by a 1% increase of the Value Added Tax (from 15% to 16%).

However, as a first measure the new Schröder Government stopped the planned reduction of the pensions as previously decided by the Kohl Government.

4. The Plans of the new Government concerning the Old-age Pension

"The goal is to stabilize the rate of contribution to the pension scheme in 1999 on the actual level (20.3%). Simultaneously, the compulsory social security of partially employed and ficticious self-employed (Scheinselbständigen) shall be implemented" (see: Koalitionsvertrag, p. 23/24).

A large pension reform is to be designed in 1999, which should encompass, among other points, the following structural reforms:

• The discharge of the pension fund from unrelated payments.
• Extension of the circle of insured people: generally every long-term worker must enter social insurance.
• Reform of the incapacity pensions.
• Regulations about life working time and old-age part-time work.
• A seperate old-age security system for women taking into account minimum and part-time wage levels.
• Measures of precaution facing the demographic change (e.g. a complementary system of capitalization).

5. The actual debate

When the new Government stopped the projected 1999 pension reform, once again discussions about the old-age pension system started.

An important starting point for many years has been the question of financing. Due to the fact that the distribution system is running short of contribution payers, and all measures to outset this development (like increasing the rate of contribution, increasing retirement age or decreasing the level of pensions) are exhausted, and not only contribution payers but also pensioners are not willing to accept further cuttings, many experts demand to change from a system of distribution to a system of capitalization or at least to complement it by such a system.

The idea is that the contribution of every single person flows into a kind of fund and gets invested. The difference from the distribution system is that the money is not just passed through to the pensioners, but every contribution payer "saves" it till the end of his working life. Resulting interest and compound interest on the pension funds could accumulate considerably higher assets. The problem when implementing such a system would be the transition period of about 40 years. The young would have to finance two systems.

Other propositions tend to a tax-financed basic pension ("Grundrente"), as favoured e.g. by the Ministerpräsident of Sachsen Kurt Biedenkopf. Further provision should be undertaken by private initiatives.

In general, private provision will become more and more important. No matter which kind of reform will be implemented- it will always be the question of how much the young working generation will be able to reduce consumption today and make savings and investments and how big and remunerative their assets will be tomorrow.

The new Minister of Labour, Walter Riester, emphasizes the goal to strengthen the government pension scheme by complementing it with "company pensions, a stronger participation of the employees on assets of productivity and self-provision"(see: Die Zeit Nr. 48, p. 26).

Much discussed and often critizised is the idea of the "Pension at 60". This concept means to quit the job at the age of 60 without having to suffer the regular pension-cuts of up to 18%. Therefore the active workers are expected to pay money into a "tariff fund", hoping the older workers would retire earlier and young people would get employed in their place. Much critizised are the supposedly high costs of this model and the fact that the young already have to carry a burden which seems to be high enough. Instead of paying further contributions to the older population, it is argued, they should better try to take private provisions for their own future.

A successful fund, on the other hand, could accumulate a capital asset from which the actual young working generation could profit as well one day.

The President of the Employers´ Association, Dieter Hundt, indeed is against such a tariff fund, but proposed recently to extend the company pensions in tariff negotiations and to use this money in order to make old-age part-time work more attractive.

The trend seems to be to let retirement appear to the older employees more attractive and to have the young people more or less to "buy themselves their jobs" (see:Zeit, Nr 48).

Walter Riester proposes a two-stage model. He wants to stabilize the existing system by complementing it with a new element. The "tariff fund", financed by a system of distribution is to become an additional capital-financed, old-age insurance within a few years from which each employee will participate with individual demands. A yet undetermined percentage of the wages will be paid into the fund, designed to encompass all industries and to include tariff bound enterprises. The money is to be invested in the capital market and the resulting fund profits are to be paid to the rightful claimants. In the first period (about 5-10 years), all pensions of those, who enter into early retirement and, according to ruling law, would have to accept cuts of up to 18%, shall be supplemented out of the fund. In the second period, all members, after a minimum number of years of paying contributions, qualify for individual claims on the tariff-fund. In this way a kind of additional capitalized insurance develops, complementing the traditional pension (see: Zeit,Nr.51,p.37).

Initially, costs of the government pension scheme would rise, because of claims by more people. The tariff-fund, however, would lead to the result that the pensions would rise more slowly. Thus later on, the pension funds would be relieved by the new additional insurance.

This concept finds more and more supporters in industry, handicraft and employers´organisations and could be the first step to a fundamental reform of the old-age pension system in Germany.

Bibliograhphy

Arne Daniels: Im Labyrinth. Und: Idee mit Schrammen,aus: Die Zeit, Nr. 48, 19.Nov. 1998.

Arne Daniels :Gemischtes Doppel, aus: Die Zeit, Nr. 51,10.Dez.1998.

Borchert, Jürgen: Renten vor dem Absturz. Ist der Sozialstaat am Ende? Frankfurt am Main, Juli 1993.

Borchert, Jürgen: Altlasten. In MLP FORUM 2/98, 7-9.

Das Parlament, Thema: Enquete-Komission "Demographischer Wandel", 48. Jahrgang/Nr. 43-44, Bonn, 16./23. Oktober 1998.

Frankfurter Institut – Stiftung Marktwirtschaft und Politik: Rentenkrise. Und wie wir sie meistern können, Bd. 21, Bad Homburg, 1997.

Frerich, Johannes: Sozialpolitik. Das Sozialleistungssystem der Bundesrepublik Deutschland, München; Wien, 1987.

Koalitionsvertrag der neuen Bundesregierung, Bonn, 20.10.1998.

Miegel, Meinhard: Sicherheit im Alter. Plädoyer für die Weiterentwicklung des Rentensystems, aus: IWG Impulse- Schriften des Instituts für Wirtschafts-und Gesellschaftspolitik, Bd. 4, Bonn Aktuell, Stgt., 1981.

VDR Info - Informationen aus der gesetzlichen Rentenversicherung: Die Änderungen im Rentenversicherungsrecht durch das Rentenreformgesetz 1999, F.a. M., Nr.4/97, Art. Nr.1.