The Dawn into the twenties
“The Dawn into the twenties“ – By the end of 2019 I had been expecting a period of a bright future. Not that I hadn’t been aware that changes will be needed, for instance to save humanity from abolishing itself through climate change.
The new decade has done much to inflict permanent damage on its image: Covid, lockdowns, supply bottlenecks, conspiracy theories, lateral thinking, war in Europe, energy crisis, gas shortage, electricity price explosion, inflation, rising interest rates, price collapses on the stock markets, real estate price collapse, staff shortage - by now not only among top specialists. However, my optimism has remained: I trust the world of technology and science to always find new solutions to existing challenges. Admittedly, some inventions and process improvements still take far too long to become reality in Germany, whether it's building an airport in Berlin, a railway station in my home town of Stuttgart, reducing the size of our parliament or reforming the state pension system. But at least we are making progress in small steps. One such small step is the introduction of the "Digital Pension Overview" (ZfDR) at the Deutsche Rentenversicherung Bund. From the summer of 2023, the free platform will be made available to all German citizens on a voluntary and simple basis and will digitally bundle a summary of statutory, occupational and private old-age provision. This step will certainly make old-age provision advice easier and will help employees to better understand this toppic. Up to now, those concerned have received the numerical values in different forms of presentation, from different providers with varying degrees of informative value. In future, the digital pension overview will thus help to clarify the need for additional provision, which is also influenced by demographic change and ECB policy. A change in the ECB's interest rate policy therefore has a direct impact on German economy and also on German pension provision. This is influenced in two ways:
On the one hand, purely demographic:
After the end of the Second World War, the number of employees in Germany stabilised. The number of pensioners was low because, unfortunately, far too many people had died or been killed in the war. Not only in Germany, of course, but also here. On a positive note, the number of people in employment reached a record level of 45.46 million in Germany in 2022. However, the number of pensioners has also increased to almost 26 million! On the other hand, through the ECB's interest rate hike. This has two opposite effects on pension products. On the one hand, the interest rate increase lowers the additional interest reserve that has been required by law since 2011. This is intended to secure the guarantees traditionally given in Germany over the long term. The reduction thus saves the product providers money. The financial strength of insurers is stabilised and strengthened. At the same time, the securities accumulated in recent times will be devalued by the increased interest rate. However, since life insurers in Germany usually act according to the motto "buy and hold", this negative effect is smaller than the positive effect described above. Mostly internationally active insurers with a broadly diversified investment structure will be able to extend their lead over purely local insurers. Products with a wide range of invested assets will help to come up with the current challenges. The income threshold for social security contributions (=Social Security Contribution Ceiling/ SSCC) had been raised. This will more than compensate for the decline in 2022, the first in German history. In the case of pensions (and for unemployment insurance), the monthly contribution limit will now be €7,300 (West)/€7,100 (East), with a constant contribution rate of 18.6%. For compulsory health and long-term care insurance, the income threshold was raised to 4,987.50 €. The compulsory insurance limit was raised to 5,550 €. The contribution rate for compulsory health insurance remains 14.6%, the additional contribution 1.6%, the compulsory nursing care insurance contribution rate is 3.05% (special feature in Saxony). Due to these changes, the calculation parameters for occupational pension provision are also derived: The tax-free amount increases by € 20 per month from € 564 to € 584 according to § 3.63 EStG. Another change results for the private "basic pension" (= "Rürup pension"). For single persons, the maximum contribution for private old-age provision expenses will be increased to € 26,528 in 2023 and made immediately deductible at 100% in full. Originally, the scale would only have provided for 96% deductibility. This small step also shows that the current government seems to be slowly understanding that demographic change must make supplementary products more attractive, especially in old-age and health provision, in order to prevent the gap within the population in Germany from widening. Due to the demographic change, but also additionally accelerated by Corona, the focus was on health provision. Already in 2021, the federal government's subsidies to the statutory pension insurance alone amounted to almost €80 billion, and another €17 billion will be necessary for the statutory health insurance (GKV/SHI) in 2023. The principle of capping contributions to the social security systems at 40% is becoming increasingly difficult. The current €80 + 17 billion already mentioned above will have to almost triple to €275 billion by 2030.
Basic public health care is coming under increasing pressure, while at the same time budgetary resources are limited. The SHI Financial Stabilisation Act has thus increased the budget by a further € 2 billion. So far, however, there has been a lack of real structural reforms that could stabilise health and long-term care insurance. On the contrary, the entitlement to benefits in long-term care insurance has been significantly expanded, thus exacerbating the cost problem. The burden on future generations is further increased. The need to enable additional health insurance for employees via employers is gaining momentum only slowly but steadily. Today, 18,200 companies in Germany already offer supplementary company health insurance for more than 1.5 million employees.
This means that the number of companies has more than quadrupled since 2015. This component of "occupational pension provision" also supports these companies in the fight for the best talent. Of course, the development of the inflation rate plays a major role in the overall remuneration package of the companies for their employees. "Forecasts are difficult, especially when they concern the future". We don’t expect changes in our current government. New elections will most likely be in September 2025. Until that time, the coalition between Social Democrats, Green party and Liberals will need to finding more compromises in spending now for being more “social” and keeping austerity (for being more orientated to future generations and respecting the stability contracts from Maastricht).
In December 2022, the inflation rate in Germany was 8.6%, slightly lower than in November (10%). Much will depend on the course of the war in Ukraine and the additional costs it has triggered, especially for energy, but also for costs caused by the resulting supply chain bottleneck. The development of the pandemic in China also has a strong influence on Germany, which is linked to the global economy through imports and exports like almost no other country and is dependent on functioning trade routes. Consumer prices for food rose by 21.1% over the course of the year, and those for energy by as much as 38.7% (source: destatis). Of course our team will be happy to support your HR and employee benefits team to make sure, that your engaged employees will remain the asset to guarantee the success of your business.
Feel free to come back to us.
Wishing you all the best for 2023 – Yours Rüdiger Blaich
Country Manager Germany Alexander Beard International Benefits Ltd; Germany