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

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Presentation on theme: "Preparing Our Pension Systems for the Future: The Case of Germany Jörn Wesenberg, LL.M. Deutsche Rentenversicherung Bund, Berlin."— Presentation transcript:

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

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

3 3 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)

4 Wage and Salary EarnersSelf-EmployedUnemployed Public SectorPrivate Sector Artists Crafts- man FarmersLiberal Profes sions Others Workers/ Employees Workers/Employees Other Miners Sectors 1. Pillar: Mandatory Schemes Civil Servant Pensio n Provi- sion Statutory Pension Insurance (GSP) General State Pension Pension for miners Farmers old-age assistance 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 Supplem antary Aid: basic security benefits in old age (tax-financed & means-tested) I. Statutory Pension: Who is insured? Civil servants Institutes for liberal profession Contributions paid into GSP by other State bodies/ Institutions General State Pension Sector Profes -sion

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

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

7 7 Old-age dependency ratio (ages 65+ as a % of age 20-64 years) 15 20 25 30 35 40 45 50 55 60 65 Percent Old-age dependendcy ratio 15,718,023,426,623,926,831,734,050,060,0 1950196019701980199020002005201020302050 Source: Federal Statistical Office, 2006

8 8 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

9 9 III. Effects of the pension reforms 1992-2007

10 10 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

11 11 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

12 12 III. Projected development of replacement rates for statutory pensions after reform 2004 Percent 20 25 30 35 40 45 50 55 60 65 70 20052006200720082009201020112012201320142015201620172018201920202021202220232024202520262027202820292030 20 25 30 35 40 45 50 55 60 65 70 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 year pension payment starts Percent

13 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 14 III. Employment rate of older workers (55-64 years) in Europe (%) Source: Eurostat 0 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

15 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 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 17 Anstieg der öffentlichen Alterssicherungsausgaben in Prozent des BIP Quelle: EU Kommission 2001; 2006 IV. Pension reforms: Financial effects Increase in public pensions expenditure, % of GDP

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

19 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: 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)

20 20 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 21 Further information Internet: Contact: Joern Wesenberg, LL.M. Deutsche Rentenversicherung Bund - Section 0330 - Hallesche Str. 1 10963 Berlin, Germany e-mail:

22 22 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

23 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 24 At-risk-of-poverty rate by age groups in EU (Poverty line: 60% of median equivalised income)

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