Germany: Call for Pension Reform by Economists
Economists Propose Comprehensive Pension Reforms in Germany
A group of economists, led by Marcel Thum and Martin Werding, have issued a warning about a "dramatic demographic challenge" in Germany's pension system. In response, they have proposed a comprehensive reform package to modernize the pension system and address the demographic crisis.
The economists advocate for a shift from traditional pay-as-you-go mechanisms to diversified, capital market-oriented solutions with greater flexibility and inclusivity. Key measures include:
- Introducing a new scalable pension product called the Altersvorsorgerdepot, which would be combined with the Frühstart-Rente to simplify and strengthen private retirement savings.
- Removing mandatory capital guarantees to place capital markets at the core of pension investments, allowing for potentially higher returns.
- Enabling more flexible payout models, such as allowing early or partial withdrawals to increase adaptability to individual needs.
- Allowing additional contributions to the Frühstart-Rente to better leverage compound interest and thus boost accumulated retirement wealth.
- Expanding eligibility to all taxpayers in Germany to increase coverage breadth and participation in the pension system.
These proposals aim to promote self-directed investing and long-term private wealth accumulation alongside existing public pension schemes.
The researchers warn that without reforms, the pension system could face an additional financial burden. The total costs of the German pension insurance could rise to more than eleven percent of the social product by 2050, according to the researchers. In 2020 prices, an additional 162 billion euros would be needed to finance the pension system in 2050 compared to 2019, if no reforms are implemented.
To stabilize the costs of the German pension insurance, the researchers propose linking the retirement age to life expectancy, strengthening the sustainability factor in the German pension system, and implementing an inflation-oriented adjustment of existing pensions.
The pension contribution rate for employees could increase from 18.6% to 22%, an increase of 3.4 percentage points. However, the researchers' reforms could potentially prevent an increase in the pension contribution rate for employees.
The government is considering legal reforms to make occupational pensions more attractive and potentially establishing a large state buffer fund to stabilize pension financing. Despite these initiatives, pension adequacy remains a concern, with about 20% of Germans aged 65+ at risk of poverty or social exclusion.
In summary, the economists' proposed reforms aim to mitigate the demographic crisis and improve retirement outcomes by promoting diversified, capital market-oriented solutions with greater flexibility and inclusivity. Without comprehensive reforms, the costs for the statutory pension insurance could rise significantly, posing a threat to the financial security of future generations.
[1] Thum, M., & Werding, M. (2021). A comprehensive reform of the German pension system. Friedrich Naumann Foundation. [2] Bundesregierung (2020). Pension reforms in Germany: A new approach for a sustainable pension system. German Federal Government. [4] Bundesministerium für Arbeit und Soziales (2019). Poverty among older people in Germany. German Federal Ministry of Labour and Social Affairs.
- The economists' proposed pension reform in Germany advocates for a shift in policy and legislation, focusing on finance and business, to modernize the pension system and address the demographic crisis.
- Policy-and-legislation changes suggest introducing a new scalable pension product called the Altersvorsorgerdepot, removing mandatory capital guarantees, enabling more flexible payout models, allowing additional contributions to the Frühstart-Rente, and expanding eligibility to all taxpayers.
- In the realm of politics, the proposed reforms aim to stabilize the costs of the German pension insurance, link retirement age to life expectancy, and implement an inflation-oriented adjustment of existing pensions to mitigate the demographic crisis and improve retirement outcomes.
