Personal Provisions of Retirement Income in Germany by Prof' Dr' HeinzDietrich Steinmeyer

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Personal Provisions of Retirement Income in
GermanybyProf. Dr. Heinz-Dietrich Steinmeyer
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Introduction

• Germany had a reform in 2001 which introduced
  subsidized private pensions and subsidized
  conversion of earnings
• Reasons for reform
• - it was feared that the contribution rate for
  public
• pension insurance would be at 26 by 2030
• - together with expected increases in public
  health
• insurance contributions too much to bear
• Aims of reform
• - keep contribution rate at about 20
• - keep total replacement at almost the same
  level
• - introduce elements of capital funding

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Introduction

• Elements of the reform in public pension
  insurance
• - changes in the benefit formula to
• take into account demographics
• gt effective 2011 increase in
• contribution rate will considerably
• cut pension benefits
• gt overall lower replacement rate of
• public pension scheme
• gt results in decrease of 6.5 in
• 2030 compared with situation without
• reform

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Introduction

• - Need to fill the gap
• gt by introducing capital funded
• personal pension so-called Riester
• Reform and Riester Pension
• gt subsidized personal pensions on a
• voluntary basis
• gt subsidized via tax deductibility,
• cash subsidies and reduced social
• insurance contribution base

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Introduction

• In case acceptance of these measures is low
  this personal pension might be made mandatory
• After six years an evaluation is possible
• Does the reform meet expectations?

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Some clarifications

• In the early nineties the German occupational
  pension system started to change from an almost
  only employer-sponsored system to a system in
  part also sponsored by the employees themselves
• Conversion of earnings (Entgeltumwandlung) also
• qualified as occupational pensions by
  Federal
• Labour Court
• Steady development during the nineties
• attractive for employees for tax reasons
• attractive for employers - less risk often
• subsidized by them

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Some clarifications

• Riester Reform in 2001
• Employers are obliged to provide plans for
  conversion of earnings
• Employees may buy other personal pensions
• Subsidies
• a. Special tax subsidy for a certain amount
  up to
• 2.520 p.a. tax deductible
• b. amount not subject to social security
• contributions, i.e. reduces the
  contributable
• amount
• c. alternatively cash subsidy (114 plus 138
  per
• child)
• d. subsidies may run up to 678 p.a.

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Some clarifications

• Applicable for
• supplementary occupational pensions via
  conversion of earnings or
• - any other annuity meeting certain requirements
  and accepted by a special authority
• gt basically the same requirements
• gt may be financial products by banks
• gt may be life insurance products

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The first years

• In the first years the acceptance was low
• Possible reasons
• - lack of awareness of need for additional
• protection
• - unattractiveness of these plans for the
• insurance industry
• - relatively low subsidies in the beginning
• - complicated rules (not so much for the
• beneficiaries but for the employers and
• insurance industry and banks)

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The first years

• There seems to be a link between simplicity of
  rules and dynamics of the system and its
  development
• Immediate acceptance could not be expected
• - experience also in other countries
• (IRA in the US)
• -people have to get used to it

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Some Reforms

• In 2005
• - rules for certification were simplified
• - system of commission for contracts
• was made more attractive
• In 2006 general requirement of unisex mortality
  tables

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Now

• These reforms and increasing awareness to provide
  for additional protection in old age have led to
  an increase
• - about three million workers do
• conversion of earnings
• - nearly ten million Riester contracts

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Now

• Reasons for this development
• - simplification of rules
• - awareness of need for additional
• protection
• - public awareness of the subsidized
• Riester Pension

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Further Push

• The rule that converted earnings reduce the
  contributable earnings amount (for social
  insurance purposes) was initially limited until
  Dec. 31, 2008
• - would have led very likely to a
• dramatic decrease in conversion of
• earnings
• - but on the other hand further reduces the
• benefit amount of the state system

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Further Push

• Now this time limit has been lifted
• Is expected to cause a further increase in those
  personal pensions
• Some opposition from public pension insurace and
  warning that this will decrease replacement rate
  of public scheme even further

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Evaluation

• To recall the history
• - the entire approach was aimed to keep the
• contribution rate for public pension
  insurance
• below 20
• - this was done by cutting the replacement
• rate in public pension insurance
• - therefore additional financial efforts
  necessary
• for people to fill the gap price for the
• replacement rate / price for old age
• provisions has increased

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Evaluation

• 2. Recent findings have shown that
• - personal pensions (Riester plans
  conversion of
• earnings) are popular among medium and
  high
• income people
• - personal pensions are not popular (not
• affordable?) by low income people
• Possible reasons
• gt not aware despite subsidies and
  basically no
• need to use own money
• gt means-tested minimum pension may be a
• disincentive

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Evaluation

• 3. Therefore
• - the aim of avoiding poverty in old
• age is not met
• - the gap is only filled for people with
• medium and higher income by
• paying a higher price

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Perspective

• Riester Pension mandatory?
• - very likely not
• gt positive development increase in
• numbers
• gt trust on further information and maybe
• incentives
• Nevertheless expected that overall replacement
  rate will decrease
• - very often no full employment career
• gt especially with women but also general

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Summary

• Mixed result
• - works in general
• - but increases total costs for same
• replacement rate
• - does not really help people with lower
• income
• gt maybe improvement of information
• gt but means tested minimum pension
• might be a disincentive