State Pension in Germany - Update 2019
by Alexander Beard, on May 10, 2019 4:37:49 PM
"Additional Savings are needed!"
German State Pension Insurance has long-term history. Otto von Bismarck, the former Chancellor of the Deutsche Reich, started the system in 1889- 130 Years now running quite smoothly in stability.
Today the system is a “Pay-as-you-go”-system: current employees (not civil servants, nor self-employed or freelancers) pay in, their employers pay in; retirees get out their pensions at the same period of time. No bank account, no savings, no capitalization. Some sources tell that in the beginning of the system life expectancy at birth had been lower than the retirement age of 60.
The system is supported by tax payers. The system is seen as social and fair. The more someone is working the higher the pension. Women are getting an upgrade for raising their children.
As long as the number of employees had been increasing compared to the numbers of retirees, all had worked in perfection.
But now: Birth rates are decreasing:
How did birth rates develop in Germany? As in almost all countries the number of children per women decreased over the past decades. In the picture you can see: Western (blue) and Eastern (red) Germany had different figures; however between 1960 and 1989 (re-unification) both came down from 2.5 children to 1.3 children per woman.
It is expected to stabilize at a level of 1.4.
And now: Life expectancy is rising:
Within the same period of time longevity increased. The important figure will be, what happens with people being aged 60 (or 65) and their “rest” longevity? On average people living in 1960 had a life expectancy of 78 years. Today the population in Germany has reached the expectation age of 85 and due to Bundesbank figures the trend will not stop before the end of the century (left graph below: life expectancy at the age of 65).
So what will happen?
The Old-Age- Ratio will rise (right graph above): The number of retirees (>65) compared to actively working people (aged 20 to below 65) will very soon strongly increase, more than doubling.
The System will have impact on the stability of society. The pressure on politicians will increase. The pressure from employees on their employers will increase.
As the German economy is also under pressure from abroad, the “war for talents”, the search for specialists will also have its impact. Many reforms had been necessary in past decades to keep the system running.
More reforms will be needed to keep it water proofed for future generations.
Current parliament had put some frames on for 2030 (2025): Retirement age will increase steadily from 65 to 67. Bundesbank gave a report that it should further increase to age 69 (Source: Dr. Christian Pfarr, Forum Bundesbank, 25-03-2019). The contributions will be kept under 22% (20%) from gross income (current percentage: 18.6%) and the level of retirement pension should not decrease below 43% (20%) of last income (current level 48.2%). All figures given are covering the income up to € 80,400 p.a.(2019) a threshold where contributions end for any income above.
These decisions will be fine without any conflicts, as the challenge will only start a bit later: the time of “baby – boomer – generation” moving into retirement!
If you don’t know what to do, set up a task force.
This is what Ms Merkel & Co. had done. Currently the German economy is still strong, unemployment rates have come down, and the numbers of employees have increased over the past years. However Brexit, US - Chinese trade conflicts, debts in Italian state budget, unpredictable developments within the remaining EU, conflicts in Africa and Middle East, Diesel – scandal, costs of climate change, all is showing: Dark clouds are coming!
Now, what can be expected?
Oh wonder: “Additional Savings Are Needed!”
The state pension system needs to be supported by a capitalization system.
Already in 2002 the German minister of labour and social affairs, Walter Riester, and the parliament of these days had agreed to decrease the level of social state pension and to subsidize a capitalization annuity system. Every employee who started savings for retirement at a minimum level of 4% of their individual gross income received state subsidies: € 175 per person, plus € 300 per child. The system even today is still voluntarily.
Now in 2019 (red line in graph below) we have the following picture (theoretical calculations – mathematics,…)
The lower lines are showing the decreasing level of pure state pension. The upper lines are showing the aggregated pension of state pension plus “Riester pension”, meaning 4% additional saving rate on top. Amazingly the level of pension will almost remain stable on 50% to 54 % of last income.
And by shifting the retirement age in future from 67 to 69 (green), the level can be pushed up to 60%!
“To Riester” is individual choice and individual administration. However the result can easily be moved onto the playing field of employee benefits. Group conditions with low admin costs and intelligent systems of capitalization will help people to safe efficiently. Employers can use the system to encourage people to add parts of their gross income and show their social responsibility. And even in times of low interest rates employee benefit systems can profit from globalization and international profits, being made by international companies. Receiving dividends and/ or share price increases. The average percentage for employee benefit pension contributions is close to 4% of individual income.
Of course employers in branches with high competition for labour will be forced to do more than others.
ABG in Germany will help you to find the best solutions for your local employees!
Country Manager - Germany (AB International Benefits B.V.)