Bittersweet victory

On Friday 23 May 2014 the German government passed a new law, the RV-Leistungsverbesserungsgesetzes. It contains four main components, one of which has been greeted with hostility in some quarters: the lowering of the state retirement age to 63 for some German citizens. Critics are concerned that this change sets a precedent, showing that the principles underpinning sensible long-term policy can be overturned by short-term political expediency.

It is easy to dismiss this change as the result of politicians seeking the ‘grey’ vote. Before the 2013 General Election, Chancellor Angela Merkel, campaigning for her party, the centre-right CDU/CSU, pledged to increase state pension benefits for older mothers; while the left of centre SPD promised to reduce the retirement age to 63 for some older workers. The results of the election forced the two parties to share power in a Grand Coalition and horsetrading has resulted in both these promises becoming law. The other two components of the new law improve pension provision for those taking early retirement for health reasons.

Under previous reforms implemented in 2007, the retirement age was set to rise from 65 to 67 between 2012 and 2029. That will still happen, but the new law removes this requirement for people born before 1953. People in this cohort who have worked for 45 years can now start drawing their state pension at 63 without suffering any actuarial reductions in benefit. Some workers who have spent a short time unemployed during those 45 years will also be eligible. The measure will cost about €900 million in 2014, a figure that will rise as the years pass, even though those born between 1953 and 1964 can retire at 65, while those born after 1964 will not be eligible to retire any earlier than 67 without actuarial reductions. It is estimated that around 150,000 people per year may now decide to retire at 63.

In April, Germany’s EU Commissioner, Günther Oettinger told the German newspaper Die Welt that he thought the change sent “wrong signals” to other EU countries, such as Greece, Spain and Portugal, where stringent austerity measures have been imposed and retirement ages are rising. Oettinger suggested that Germany’s leaders should instead be considering raising the retirement age to 70. It is worth noting that Germans already work for an average of 37 years, compared to the EU average of 35 years.

In June the European Commission warned Germany that the new law could undermine further development of its occupational pensions pillar. Historically, most Germans have relied heavily on the state pension, a pay-as-you-go system paid for by employees, employers and government, but it can be supplemented by a second pillar of occupational pensions, although fewer than half of all German employees are members and only around 40 per cent of employers provide such schemes. In May, the minister for labour and social affairs, Andrea Nahles, said her next priority was to increase occupational pension coverage among smaller and medium sized enterprises. There is also a third pillar of private pension schemes.

Winners and losers

But the big problem is Germany’s ageing population. Between 2002 and 2012 the proportion of the German population either under 15 or over 65 increased from 45.6 per cent to 51.2 per cent, the biggest increase in Europe, according to The Economist Intelligence Unit.

Markus Sailer, senior economist in the research department at Deutsche Rentenversicherung Bund (the Federal Institute for German Pension Insurance), points out that many of those now able to retire at 63 will have worked in a particular set of industries and may already be set to enjoy relatively generous pensions: around €1,400 per month, plus income from an occupational pension. “This is not the end of the income bracket we should really be worrying about,” he says.

The new law undermines the principles that underpin the pension system, says Michela Coppola, senior economist at the Munich Center for the Economics of Aging (MEA). “The idea is that people who have put the same contribution in as others should get the same pension,” she says. “With this law you break this rule, because people who have contributed for 45 years can go at 63 with no reductions, while someone who pays higher contributions over a shorter period cannot.”

“Those politicians who wanted to have this law really believe that there are people who have a right to retire early,” says Thomas Hagemann, chief actuary for Mercer in Germany.

“I see the argument, but they only looked at the older generation, which will retire in the next few years. Those who retire in 20 years may also have worked 45 years, but they won’t have this choice.”

Many employers will also now lose skilled and experienced workers sooner, at a time when many had been preparing to cater for the needs of older workers, to encourage more of them to continue working, according to research commissioned from The Economist Intelligence Unit by Towers Watson. Almost half (48 per cent) of German employers would invest to help older employees keep skills up to date, while 45 per cent planned to make physical changes to their workplace. To change the law so that more people retire early seems counterproductive, says Thomas Jasper, leader of retirement solutions for Towers Watson in Germany.

Suggested reforms

What sorts of reforms would be more welcome? Sailer thinks more efforts to ensure that the lowest wage earners get a good pension should be an urgent priority. He hopes to see some kind of auto-enrolment scheme in the future.

He would also like to see more incentives to save in second and third pillar schemes offered to those on lower incomes. He welcomes the recent introduction of Germany’s first minimum wage (to be set at €8.15 per hour from 2015), but notes that anyone earning at this level would need to work for the full 45 years, full time, to earn pension contributions that outstripped the basic state pension entitlement. “Perhaps [first pillar benefits] could be higher when you can show you have saved in a second or third pillar plan for a number of years?” he suggests.

One near universal desire throughout the German pensions industry is to see an easing of regulatory burdens. There have been complaints about the additional administration requirements associated with the EU’s IORP II Directive. The German Federation of Company Pension Funds (VFPK) estimates that IORP II could increase administration costs by a third. There are also concerns that additional measures may be added to the directive when it is reviewed in 2018 – capital requirements similar to those in Solvency II – which could have serious, adverse consequences for many occupational funds.

Sailer believes more could be done to improve the third pillar, where returns have suffered during years of volatility in the financial markets, but pension providers do not generally compete on a cost basis. “So there is not much hope that there will be a decline in costs to make up partially for [declining returns],” he says. “The competitive model is not working.”

What most of the industry seems to agree on is that the early retire-ment component of the new law is a bad idea. “The guiding principles for reforms should be that the system should be managed for the long term and that not all the costs will be paid by one generation,” says Hagemann. “This law is only for a few people; and young people pay for it but don’t have any advantage from it – and there is no positive effect on the system in the long run.”

David Adams is a freelance journalist

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