Preparing Our Pension Systems for the Future:
The Case of Germany
Jörn Wesenberg, LL.M.
Deutsche Rentenversicherung Bund, Berlin
Outline
I.
II.
III.
IV.
V.
Structure of the German Statutory Pension System
(GSP)
Demographic challenges for GSP
The main reforms undertaken so far
• 1992/2001/2004/2007
Effects and results of the German reform path
• Financial sustainability
• Adequacy of pensions
Conclusion and outlook
2
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)
3
I. Statutory Pension: Who is insured?
Wage and Salary Earners
Public Sector
Self-Employed
Unemployed
Private Sector
Sector
Profes
-sion
Civil
servants
Workers/
Employees
Workers/Employees
Artists
Other
Sectors
1. Pillar:
Mandatory
Schemes
Civil
Servant
Pensio
n
Provision
Miners
Statutory Pension Insurance (GSP)
General State Pension
Pension
for miners
2. Pillar:
Additional
Additional
schemes
pension plan for Old-age pension schemes
public sector
3. Pillar:
Private
schemes
Supplem
antary
Aid:
Craftsman
General State
Pension
Occupational
Privately financed pension-plans (savings, insurances, properties)
- promoted by the State
basic security benefits in old age (tax-financed & means-tested)
Farmers
Liberal
Profes
sions
Farmers
old-age
Institutes
assistance for liberal
profession
Others
Contributions
paid into GSP
by other State
bodies/
Institutions
II. Demographic trends in Germany –
birth-rate
per 1000 women
3000
2500
2000
1500
1000
500
30
0
2
20
0
2
10
0
2
00
0
2
90
9
1
80
9
1
70
9
1
60
9
1
1
9
52
0
Former West-Germany
Former GDR and East-Berlin
Source: Federal Statistical Office, 2006.
5
II. Demographic trends in Germany –
Key figures of pensioners insured in GSP
24
Average duration of the receipt
of statutory pensions (in years)
Projected life-expectancy
for pensioners aged 65
21
in years
18
15
12
9
1960
1980
2005
Table
1982/84
Table
2003/05
Projection
2030
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
Source: Deutsche Rentenversicherung Bund
6
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
Percent
45
40
35
30
25
20
15
1950
Old-age dependendcy ratio 15,7
1960
18,0
1970
23,4
1980
26,6
1990
23,9
2000
26,8
2005
31,7
2010
34,0
2030
50,0
2050
60,0
Source: Federal Statistical Office, 2006
7
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
8
III. Effects of the pension reforms 1992-2007
45
40
Prognos '87 lower Level
41,7
with Pension Reform '92
2006 before latest reform
36,6
after reform 2007
30
26,9
25
22,9
20
21,9
15
18,7
20
30
20
20
20
10
20
00
10
19
00
in %
35
Prognos '87 upper Level
9
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
10
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
11
70
70
65
65
60
60
55
55
50
50
45
45
40
40
35
35
30
30
25
25
20
20
Percent
Percent
III. Projected development of replacement rates for
statutory pensions after reform 2004
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
12
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“
13
III. Employment rate of older workers (55-64
years) in Europe (%)
2000
2005
70
60
50
40
30
20
10
0
Source: Eurostat
14
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
15
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
16
IV. Pension reforms: Financial effects
Increase in public pensions expenditure,
Anstieg der öffentlichen Alterssicherungsausgaben in
% of GDP
Prozent
des BIP
9,7
10,0
7,9
7,4
7,1
6,4
6,0
Increase 2000-2050
6,2
Increase 2004-2050
5,5
5,1
4,7
4,2
4,1
3,7
4,1
3,5
3,3
3,2
3,1
2,1
2
1,7
2,0
4,4
4,0
2,6
2,2
2,0
-2,0
-1,2
BE
DE
DK
ES
FI
FR
Quelle: EU Kommission 2001; 2006
IE
IT
2,2
0,6
0,4
AT
2,3
LU
NL
PT
SE
UK EU15 EU25
-1,1
17
IV. Pension reforms: Adequacy of pensions
Current risk-of-poverty rate by age
groups (Poverty line: 60% of median equivalised income)
18
age 65+
17
age 75+
70
60
age 0- 64
17,5
Theoretical replacement rates projected
Total net replacement
rate
Total gross
replacement rate
Gross repl. rate 1.
pillar
Gross repl. Rate 2. /3.
pillar
50
16,5
40
16
30
15,5
15
20
14,5
10
14
0
13,5
DE
EU 25
2005
2030
2050
Source: EU-Kommission 2006
18
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)
9.000.000
Investementf ondsverträge
8.000.000
Banksparverträge
Versicherungsverträge
7.000.000
6.000.000
5.000.000
4.000.000
3.000.000
2.000.000
1.000.000
0
01
20
2
00
I/2
2
02
02
00
20
20
II/2
III/
IV/
3
00
I/2
3
03
03
00
20
20
II/2
III/
IV/
4
00
I/2
4
04
04
00
20
20
II/2
III/
IV/
5
00
I/2
5
05
05
00
20
20
II/2
III/
IV/
6
00
I/2
6
06
06
00
20
20
II/2
III/
IV/
19
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?
20
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. 1
10963 Berlin, Germany
e-mail: joern.wesenberg@drv-bund.de
21
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
22
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
23
At-risk-of-poverty rate by age groups in EU
(Poverty line: 60% of median equivalised income)
45
age 0- 64
40
age 65+
35
age 75+
30
25
20
15
10
5
0
DE NL
AT FR SE DK
FI
BE UK ES IRL EU
25
24