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Preparing Our Pension Systems for the Future: The Case of Germany
Jörn Wesenberg, LL.M. Deutsche Rentenversicherung Bund, Berlin
2
I. Structure of the German Statutory Pension System (GSP)
II. Demographic challenges for GSP
III. 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
O u t l i n e
3
I. German Statutory Pension System:Characteristics
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)
Wage and Salary Earners Self-Employed Unemployed
Public Sector Private Sector
Artists
Crafts-man
Farmers Liberal Professions
Others
Workers/
Employees
Workers/Employees
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
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)
I. Statutory Pension: Who is insured?
Civil servants
Institutes for liberal profession
Contributions paid into GSP by other State bodies/ Institutions
General State Pension
Sector
Profes-sion
5
II. Demographic trends in Germany – birth-rate
Source: Federal Statistical Office, 2006.
per 1000 women
6
II. Demographic trends in Germany – Key figures of pensioners insured in GSP
9
12
15
18
21
24
in y
ea
rs
Women West 10,6 13,8 19,3 17,4 20,2 22,6
Men West 9,6 11,0 15,2 13,5 16,3 19,1
1960 1980 2005Table
1982/84Table
2003/05Projection
2030
Average duration of the receipt of statutory pensions (in years)
Projected life-expectancy for pensioners aged 65
Source: Deutsche Rentenversicherung Bund
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)
15
20
25
30
35
40
45
50
55
60
65P
erc
en
t
Old-age dependendcy ratio 15,7 18,0 23,4 26,6 23,9 26,8 31,7 34,0 50,0 60,0
1950 1960 1970 1980 1990 2000 2005 2010 2030 2050
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
36,6
41,7
26,9
22,9
21,918,7
10
15
20
25
30
35
40
45
in %
Prognos '87 upper Level
Prognos '87 lower Level
with Pension Reform '92
2006 before latest reform
after reform 2007
III. Effects of the pension reforms 1992-2007
10
III. Major pension reforms (b)
Reforms 2001:
• new paradigm: stable contribution rate (2020: <20%, 2030: < 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
Per
cen
t
20
25
30
35
40
45
50
55
60
65
70
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
20
25
30
35
40
45
50
55
60
65
70
Total gross replacement rateNet replacement rate for 1. year pensioners, reform projections 2004Net replacement rate without 2004 reform on taxation of pensionsMinimum net replacement rate level by law (before 2004 reform)Net replacement rate before taxation
year pension payment starts
Per
cen
t
13
III. Major pension reforms (d)
Reform 2007: Pension age
• from 2012 to 2029 gradual pension age rise (6567) • 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
0
10
20
30
40
50
60
70
Poland
Slovakia
Slowenia
Malta
ItalyLuxem
bourg
Belgium
Austria
Hungary
France
Greece
EU25Spain
EU15Czech Republic
Germany
Lithuania
Latvia
Portugal
Cyprus
Ireland
Finland
Estonia
United Kingdom
Denmark
Sweden
2000
2005
15
III. Major pension reforms (e)
Reform 2007 – assessment
pension-age rise 6567 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
Quelle: EU Kommission 2001; 2006
4,23,7
5,5
4,1
7,9
4,7
4,04,4
2,1 2,2
6,2
4,1
2,6
-1,1
3,2
-1,2
5,1
1,7
3,3
7,1
3,1
2
6,4
0,4
7,4
3,5
9,7
0,6
2,02,3 2,2
-2,0
2,0
6,0
10,0
AT BE DE DK ES FI FR IE IT LU NL PT SE UK EU15 EU25
Increase 2000-2050
Increase 2004-2050
IV. Pension reforms: Financial effects
Increase in public pensions expenditure,
% of GDP
18
IV. Pension reforms: Adequacy of pensions
13,5
14
14,5
15
15,5
16
16,5
17
17,5
18
DE EU 25
age 0- 64
age 65+
age 75+
Source: EU-Kommission 2006
Current risk-of-poverty rate by age groups (Poverty line: 60% of median equivalised income)
Theoretical replacement rates projected
0
10
20
30
40
50
60
70
2005 2030 2050
Total net replacementrate
Total grossreplacement rate
Gross repl. rate 1.pillar
Gross repl. Rate 2. /3.pillar
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)
0
1.000.000
2.000.000
3.000.000
4.000.000
5.000.000
6.000.000
7.000.000
8.000.000
9.000.000
Investementfondsverträge
Banksparverträge
Versicherungsverträge
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/pensions.html
http://ec.europa.eu/employment_social/social_protection/pensions_en.htm
Contact:Joern Wesenberg, LL.M.Deutsche Rentenversicherung Bund- Section 0330 -Hallesche Str. 110963 Berlin, Germanye-mail: [email protected]
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)
0
5
10
15
20
25
30
35
40
45
DE NL AT FR SE DK FI BE UK ES IRL EU25
age 0- 64
age 65+
age 75+