“People will always have children.” This is supposedly what Chancellor said — himself a father of seven — in 1955, when the question arose as to which pension system the still young Federal Republic should adopt.
Under Adenauer’s leadership, it was decided that Germany would adopt a : The working population would finance pensioners by paying a percentage of their salaries. But the system could only work if the birth rate remained high and life expectancy low.
In 1955, statistically speaking, every woman gave birth to 2.3 children, and the trend was rising. In 1964, a total of 1.35 million children were born in what was then still a divided Germany. It is not for nothing that the generation born between 1950 and 1964 is known as the baby boomer generation.
Germany is aging rapidly
But then came the 1970s, when the wide availability of effective contraception led to a . In 1975, there were only around 785,000 births in Germany in total, and the annual number of new babies has not increased significantly since then.
This means that the German population is aging, which has serious consequences for the pension system. The Federal Statistical Office estimates that by 2039, one-third of all people currently employed will retire. “Younger age groups will not be able to replace the baby boomers in terms of numbers,” statisticians emphasized.
This will be felt in the economy as the number of skilled workers decreases and as the intergenerational contract established by Adenauer to pay for pensions is faced with seemingly insurmountable problems.
“In the long term, this will put pressure on the social security system, because more people will have to be supported by fewer contributors and taxpayers,” Stefan Kooths of the Kiel Institute for the World Economy (IfW) told the Reuters news agency. “Overall, this will exacerbate conflicts over distribution.”
Employees and companies who make contributions to the pension fund will see their pension fees rise. And this, according to Kooths, will also make Germany a less attractive location for investment and skilled workers. This could result in a downward spiral of rising tax rates and an exodus of qualified workers, who are generally also the most mobile.
Don’t mess with the (old) voters
The intergenerational contract established by Adenauer has been growing less functional for years. In 1962, six employees financed one pensioner. In 2020, the figure was 1.8 employees, and the trend is declining.
Although politicians have long recognized that the the current pension system has reached its limits, little has been done about it. On the one hand, this is because politicians do not want to upset older voters and impose cuts on them. On the other hand, Germany has had high levels of immigration over the past ten years, which has temporarily softened the effects of the demographic change.
Now the government wants to set up a pension commission to draw up proposals — but not until 2026. In the short term, measures are also to be put in place to secure pension levels for the coming years. There are already many ideas for this.
Researchers at the German Institute for Economic Research (DIW), for example, are proposing a new tax known as the “Boomer Soli.” Modelled on the “Solidaritätszuschlag” (solidarity surcharge), or “Soli” for short, which was an additional fee on income tax introduced in the 1990s to help finance , this is a levy that pensioners would pay today.
With this plan, wealthier pensioners and civil servants who are no longer working would have to pay a little extra into the system. Researchers calculate that a special levy of ten percent on all retirement income, including assets and company pensions, would only represent a moderate burden on the 20% of pensioner households with the highest incomes, or those with an allowance of around €1,000 ($1,164) per month.
“Baby boomers should take responsibility for their decisions,” said DIW director Marcel Fratzscher, explaining the proposal in an interview with the Süddeutsche Zeitung newspaper. “They had fewer children, and their working hours hardly increased with their life expectancy. That’s why they should contribute financially.” Also, Fratzscher says that the costs of health care and elderly care have risen massively with the increase in life expectancy. This cannot be at the expense of younger people.
In fact, working people are paying more and more into pension, health, and nursing care funds every year. For decades now, the state has had to pump increasing amounts of tax revenue into the pension fund every year in order to keep it afloat.
At around €100 billion per year, this is now one of the largest parts of the federal budget.
Criticism from all sides
The DIW’s proposals have been met with little enthusiasm, and not only among those who would have to foot the bill. Politicians from the governing (CDU) have expressed opposition. “I can’t just tell someone who is retiring and has calculated their portfolio that I’m going to take ten percent away from them overnight,” Gitta Connemann, the government’s commissioner for small and medium-sized businesses, told the RTL TV network.
Anja Piel, member of the executive board of the German Trade Union Confederation, was also critical of the proposals, saying that making up the shortfall in pensions by redistributing it among pensioners was not the answer. “A solidarity levy on pensions also leaves the highest incomes in the country untouched: Rental and lease income, corporate profits, and interest,” said Piel.
Is Germany doing something wrong?
Could Germany follow ? In the Netherlands and Austria, the pension systems are considered stable — and in fact, there are significant differences between them and the German system.
In Germany, only employees are required to pay part of their income into the pension fund. The rate is 18.6%, half of which is paid by employers. Civil servants, the self-employed, and some other professional groups are exempt from this obligation. As a result, only 79% of all employed people pay into the pension fund. In Germany, you are entitled to a pension after just five years of contributions.
In other countries, more money flows into the pension system. In Austria, there is a uniform mandatory system for almost everyone in employment, who pay 22% of their salary, significantly more than employees in Germany. Of this, employers pay 12% and employees 10%. The minimum insurance period to receive a pension is 15 years, and pensions are taxed.
In the Netherlands, every resident is entitled to a basic pension, depending on how long they have lived in the country. To qualify, workers must contribute 17.9% of their income to the pension fund. In addition to the basic pension, 90% of all employees finance a company pension together with their employers. An additional private pension provision is subsidized by the state, but is voluntary.
In Germany, only one in two employees has additional coverage in the form of a company pension. The federal government wants to change this. Tax incentives for company pensions are set to increase, and employees will have to opt out if they do not want part of their salary to be automatically allocated to a company pension.
This article was originally written in German.
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