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Preparing Our Pension Systems for the Future: The Case of Germany

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Presentation on theme: "Preparing Our Pension Systems for the Future: The Case of Germany"— Presentation transcript:

1 Preparing Our Pension Systems for the Future: The Case of Germany
Jörn Wesenberg, LL.M. Deutsche Rentenversicherung Bund, Berlin

2 O u t l i n e Structure of the German Statutory Pension System (GSP)
Demographic challenges for GSP 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

3 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)

4 Wage and Salary Earners
I. Statutory Pension: Who is insured? Wage and Salary Earners Self-Employed Unemployed Public Sector Private Sector Artists Crafts-man Farmers Liberal Professions Others Sector Profes-sion Civil servants 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 Contributions paid into GSP by other State bodies/ Institutions Institutes for liberal profession General State Pension 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)

5 II. Demographic trends in Germany – birth-rate
per 1000 women Source: Federal Statistical Office, 2006.

6 II. Demographic trends in Germany – Key figures of pensioners insured in GSP

7 II. Demographic trends in Germany – Key figures of pensioners insured in GSP
Old-age dependency ratio (ages 65+ as a % of age years) 65 60 55 50 45 Percent 40 35 30 25 20 15 1950 1960 1970 1980 1990 2000 2005 2010 2030 2050 Old-age dependendcy ratio 15,7 18,0 23,4 26,6 23,9 26,8 31,7 34,0 50,0 60,0 Source: Federal Statistical Office, 2006

8 III. Major pension reforms (a)
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 III. Effects of the pension reforms 1992-2007

10 III. Major pension reforms (b)
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)
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
70 70 65 65 60 60 55 55 Percent 50 50 45 Percent 45 40 40 35 35 30 30 25 25 20 20 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 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

13 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“

14 III. Employment rate of older workers (55-64 years) in Europe (%)
10 20 30 40 50 60 70 Poland Slovakia Slowenia Malta Italy Luxembourg Belgium Austria Hungary France Greece EU25 Spain EU15 Czech Republic Germany Lithuania Latvia Portugal Cyprus Ireland Finland Estonia United Kingdom Denmark Sweden 2000 2005 Source: Eurostat

15 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

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
IV. Pension reforms: Financial effects 4,2 3,7 5,5 4,1 7,9 4,7 4,0 4,4 2,1 2,2 6,2 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 2,0 2,3 -2,0 6,0 10,0 AT BE DE DK ES FI FR IE IT LU NL PT SE UK EU15 EU25 Increase Increase Anstieg der öffentlichen Alterssicherungsausgaben in Prozent des BIP Increase in public pensions expenditure, % of GDP Quelle: EU Kommission 2001; 2006

18 IV. Pension reforms: Adequacy of pensions
Current risk-of-poverty rate by age groups (Poverty line: 60% of median equivalised income) Theoretical replacement rates projected Source: EU-Kommission 2006

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: ) including the public sector a total of 60% clear rise of contracts for Riester-pensions 2006: 2,4 million new contracts (total: 8 million)

20 possible issues for the future:
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:
Contact: Joern Wesenberg, LL.M. Deutsche Rentenversicherung Bund - Section Hallesche Str. 1 10963 Berlin, Germany

22 I. Statutory Pension – some key figures
Insured (in 2006) approx million insured persons approx million “actively insured” nearly 80% of all in Germany gainfully in work Pensions (in 2006) approx 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)

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