What do Germans live on in old age?
What do Germans live on in old age?
Friday, 20 January 2023
The average age in my home town of Tauberbischofsheim is 45.1 years. It is likely to have increased steadily in recent years. As it has been in the rest of the country. Today every second person in Germany is older than 45, and every fifth person is older than 66.
This development is both a blessing and a challenge.
A challenge when it comes to the question of what Germans live on in old age since they live mainly from the wages of the working people.
The system is called pay-as-you-go pension insurance, which is how Germany’s statutory pension insurance scheme is organised.
The fact that working people finance pensioners worked well as long as the ratio between workers and pensioners was stable. But that will soon change with the retirement of the baby boomers, who, in turn, have had far fewer children than their parents.
12.9 million economically active people will reach statutory retirement age in the next 15 years.
This development has been foreseeable for decades.
What have politicians done to counter the emerging financing problem of a pay-as-you-go system in the face of demographic change? Little to nothing.
What could politics have done?
Parts of the pension insurance system should have been converted from a pay-as-you-go system to a funded system.
Because capital funding is somewhat immune to demographic change. Because there the working generation saves for their own pension.
There was a half-hearted and overcautious start towards the capital market in the early 2000s with the so-called Riester pension, a state-subsidised private pension scheme.
There is also a plan in the current federal government for capital funding of the pension system. The so-called Aktienrente was the flagship proposal put forward by the Liberal Party, FDP, during the electoral campaign in 2021. And the governing traffic light coalition (named after the three parties' traditional colours; FDP is yellow) agreed to allocate €10 billion for a state stock pension. From the year 2037, the financing of the pay-as-you-go system is to be supported with the interest from this investment.
But this is just a drop in the bucket.
Experts estimate that each future pensioner would receive only about one euro per month from that state stock pension.
One could now argue that much more capital is needed. Finance Minister Christian Lindner, FPD, argues that way. A three-digit billion amount should be invested from the end of the 2030s.
But it’s maybe too late.
Since Germany’s statutory pension insurance scheme is organised on a pay-as-you-go basis, it is very difficult to switch to a funded system in a situation where the burden on contributors in the existing system increases.
Such a switch would double the burden on the generation of taxpayers and contributors: with payments for current retirees and payments to build up the capital stock for their own pensions.
What do we learn from all this?
Politics is bad at making far-reaching decisions. Decisions that go beyond the next election date. The statutory pension insurance in Germany is an example of this. They shut the stable door after the horse has bolted.
The only thing left to do now is to share the inevitable burdens resulting from the retirement of baby boomers fairly between pensioners on the one hand and taxpayers and contributors on the other.
It is to be feared that the younger (working) generation will also be disadvantaged here. Because the older generation will be in the majority. And politicians tend to make politics for majorities.
Growth and progress might be the only helpful companion to ensure that the young generation will not be worse off than their parent's generation.