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Preparing Our Pension Systems for the Future: The Case of Germany

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Title: Preparing Our Pension Systems for the Future: The Case of Germany


1
Preparing Our Pension Systems for the Future
The Case of Germany
  • Jörn Wesenberg, LL.M.
  • Deutsche Rentenversicherung Bund, Berlin

2
O u t l i n e
  • Structure of the German Statutory Pension System
    (GSP)
  • Demographic challenges for GSP
  • The main reforms undertaken so far
  • 1992/2001/2004/2007
  • IV. Effects and results of the German reform path
  • Financial sustainability
  • Adequacy of pensions
  • V. Conclusion and outlook

3
German Statutory Pension SystemCharacteristics
  • compulsory system
  • linked to gainful employment
  • insurance principle equal value of contributions
    and pension benefits income related wage
    compensation
  • no minimum/basic pension level within the GSP
  • financed through mutual contributions of
    employers and employees (50/50) ? currently 19,9
  • financed on a pay-as-you-go basis (75/25)
  • rehabilitation prior to paying pensions
  • mutually self-administered (insured/employers)

4
I. Statutory Pension Who is insured?
Wage and Salary Earners Self-Employed Unemployed
Public Sector Private Sector
Artists Crafts-man Farmers Liberal Professions Others
Sector Profes-sion
Workers/ Employees Workers/Employees
Civil servants
Other Miners Sectors
1. Pillar Mandatory Schemes Civil Servant Pension Provi-sion Statutory Pension Insurance (GSP) General State Pension Pension for miners Farmers old-age assistance

Contributions paid into GSP by other State
bodies/ Institutions
Institutes for liberal profession
General State Pension
2. Pillar Additional schemes Additional Occupational pension plan for Old-age pension schemes public sector

3. Pillar Private schemes Privately financed pension-plans (savings, insurances, properties) - promoted by the State
Supplemantary Aid basic security benefits in old age (tax-financed means-tested)
5
II. Demographic trends in Germany
birth-rate
per 1000 women
Source Federal Statistical Office, 2006.
6
II. Demographic trends in Germany Key figures
of pensioners insured in GSP
7
II. Demographic trends in Germany Key figures
of pensioners insured in GSP
Old-age dependency ratio (ages 65 as a of age
20-64 years)
65
60
55
50
45
40
Percent
35
30
25
20
15
1950
1960
1970
1980
1990
2000
2005
2010
2030
2050
Old-age dependendcy ratio
15,7
18,0
23,4
26,6
23,9
26,8
31,7
34,0
50,0
60,0
Source Federal Statistical Office, 2006
8
III. Major pension reforms (a)
  • Reform 1992
  • change to net adjustment of pensions
  • adjustment of pension formula (target 70 net
    income)
  • raise of the retirement ages 60/63 to 65 from
    2001
  • reductions for early retirement (0,3 per month)
  • possibility to draw partial pensions
  • linkage of federal subsidies to contribution rate
    and pension level

9
III. Effects of the pension reforms 1992-2007
10
III. Major pension reforms (b)
  • Reforms 2001
  • new paradigm stable contribution rate (2020
    lt20, 2030 lt 22)
  • long-term pension level fall to 67 (2030) of net
    income
  • new (modified) gross adjustment of pensions
  • strengthening of capital funded 2. and 3. pillars
  • 2nd pillar new right to wage conversion in
    occupational schemes
  • 2nd / 3rd pillar Riester pension (promotion
    through tax benefits and state bonuses,
    contributions guaranteed)
  • Basic security benefits (tax financed means
    tested)
  • annual information of all insured above age 26 of
    GSP pension sum

11
III. Major pension reforms (c)
  • Reform 2004
  • introduction of sustainability factor into
    pension formula
  • pension rise linked to ratio of
    standard-pensioners vs. standard-insured
    (employees)
  • sustainability factor can not lead to direct
    pension cuts
  • gross pension adjustment again modified
  • net replacement rate before tax shall be kept
    above 43 in 2030 (if below 46 government needs
    to report to parliament)
  • modifications specific retirement
    ages/educational periods
  • gradual reform of pension taxation (pensions vs.
    contributions) will lead to significant cuts in
    future level of net pensions

12
III. Projected development of replacement rates
for statutory pensions after reform 2004
70
70
65
65
60
60
55
55
Percent
50
50
45
45
Percent
40
40
35
35
30
30
25
25
20
20
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
year pension payment starts
Total gross replacement rate
Net replacement rate for 1. year pensioners,
reform projections 2004
Net replacement rate without 2004 reform on
taxation of pensions
Minimum net replacement rate level by law (before
2004 reform)
Net replacement rate before taxation
13
III. Major pension reforms (d)
  • Reform 2007 Pension age
  • from 2012 to 2029 gradual pension age rise
    (65?67)
  • new type of pension from 2012
  • full pension at 65 without reductions for insured
    having paid contribution for 45 years
  • possibility to make up for pension cuts so far
    not realized
  • pension level protection clause modified
  • from 2011 a rise in wages and in pensions ? will
    be partly offset against cuts not realised since
    2005
  • government to report regularly on labour market
  • initiative 50plus

14
III. Employment rate of older workers (55-64
years) in Europe ()
Source Eurostat
15
III. Major pension reforms (e)
  • Reform 2007 assessment
  • pension-age rise 65?67 useful measure
  • missing corner-stone in latest reforms
  • financially lower contribution rate (-0,5 in
    2030)
  • effects for sustainability factor ? higher rise
    of pensions
  • problem new pension for extra long contribution
    years
  • however unjust effects (women twisted careers
    only contribution years count, not sum of
    acquired pension credits)
  • financially negative effects for contribution
    rate (0,2/2030)
  • problem less transparency for pension adjustment

16
IV. Pension reforms The central elements
  • paradigm of stable contribution rates
  • incentives for 2. and 3. pillar schemes
  • modifications for pension adjustment formula
  • modified gross adjustment
  • sustainability factor
  • reform of pension taxation
  • prolonging working lives
  • closing early retirement paths with short
    transitions
  • raising statutory pension age to 67
  • raising the employment rates of age 55
  • information campaigns

17
Anstieg der öffentlichen Alterssicherungsausgaben
in Prozent des BIP

IV. Pension reforms Financial effects
Increase in public pensions expenditure, of GDP
Quelle EU Kommission 2001 2006
18
IV. Pension reforms Adequacy of pensions
Current risk-of-poverty rate by age groups
(Poverty line 60 of median equivalised income)
Theoretical replacement rates projected
Source EU-Kommission 2006
19
IV. Pension reforms Trends in 2. and 3. pillar
  • more and more 2. and 3. pillar pension schemes
  • 46 of private sector employees (date
    30.06.2004)
  • including the public sector a total of 60
  • clear rise of contracts for Riester-pensions
  • 2006 2,4 million new contracts (total 8
    million)

20
V. C o n c l u s i o n
  • current situation
  • system financially sustainable
  • adequate future pension replacement rates
    together with 2. and 3. pillar schemes
  • possible issues for the future
  • rise in discontinuous flexible work forms
    outside social security
  • sinking entitlements for low wage earners /
    long-term unemployed
  • development of additional pension schemes (2.
    and 3. pillar)
  • rise of old-age poverty rates?

21
Further information
  • Internet
  • http//www.bmas.bund.de/Englisch/Navigation/pensio
    ns.html
  • http//ec.europa.eu/employment_social/social_prote
    ction/pensions_en.htm
  • Contact
  • Joern Wesenberg, LL.M.
  • Deutsche Rentenversicherung Bund
  • - Section 0330 -
  • Hallesche Str. 1
  • 10963 Berlin, Germany
  • e-mail joern.wesenberg_at_drv-bund.de

22
I. Statutory Pension some key figures
  • Insured (in 2006)
  • approx. 51.7 million insured persons
  • approx. 34.7 million actively insured
  • nearly 80 of all in Germany gainfully in work
  • Pensions (in 2006)
  • approx. 18.5 million old-age pensions paid-out
  • 1.65 million invalidity pensions
  • 5.9 million pensions for widows and orphans
  • Finances (in 2005)
  • 231 billion income
  • 235 billion expenditures

23
General preconditions
  • qualifying periods
  • general waiting period 5 years of
    contributions
  • Regular pension age (65 years)
  • Invalidity pensions
  • Survivors pensions
  • specific waiting periods 15, 20, 25, 35 years
  • specific legal and personal pre-conditions

24
At-risk-of-poverty rate by age groups in EU
(Poverty line 60 of median equivalised income)
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