Next German govt should refrain from offering pension boost – ifo Institute

The next German federal government should refrain from providing additional pension benefits, according to the Munich-based research institute, ifo Institute.

In a new research article, authors Joachim Ragnitz, Felix Rösel, and Marcel Thum said doing so would drive up the already growing expenses for old-age provision. If pension financing is to remain stable, they write, an increase in the retirement age cannot be avoided in the long term. It should be linked to life expectancy or to years of life with good health, instead, they say.

Germany is due to hold a federal election on 26 September but ifo Institute Dresden branch director, Marcel Thum, said that in order to finance the already foreseeable additional costs of pension insurance through value-added tax alone, the tax rate would have to rise from 19 per cent to 23 per cent between now and 2030.

“By 2050, the full VAT rate would actually have to rise to 27 per cent,” he added. Demographic change is responsible for three-quarters of these additional costs for pension insurance, while one-quarter of the additional costs are attributable to the pension packages from 2014 to 2020, the article stated.

In addition, Ragnitz points out what the consequences would be if the government extended pension insurance benefits: “The impact would be utterly dramatic if the new government promises both to keep the contribution rate below 20 per cent beyond 2025 and not to let the standard pension level fall below 48 per cent of average earned income.”

Thum added: “Keeping such a promise would entail spending 60 per cent of the federal budget on pensions.” Even without this “double stop line,” pension fund financing will consume almost 40 per cent of the federal budget by 2050.

“One particularly serious factor is that pensions are currently rising faster than employees’ wages,” Ragnitz explained.

The pension adjustment mechanism would in fact have avoided such a development, but it has been suspended until 2025. “This suspension alone accounts for one-third of the reform-related increase in 2030 and 46 per cent in 2050,” Ragnitz said. The reason this effect is so strong is that the pension level is increased permanently. “This could still be reversed now,” Ragnitz added, “but that would require appropriate action immediately after the election.”

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