Without pension reform, this fate threatens the current generation later on
(Source: Google, Tagesspiegel)
These days, huge sums of money are being spent to counter the consequences of all kinds of crises. In the background is a problem that can easily unbalance all national budgets in the long run. It is the unresolved issues of a pension system that is in urgent need of reform.
The state pension system (statutory pension insurance) of 1891 is justifiably a German invention. However, it was not conceived for the benefit of the working population, but primarily served to provide a regulated supply of used human labour of the industrial society. About 1900, society had a simple starting point. People often remained local. There was little fluctuation. Retirement began around age 65. Life expectancy was low. Statistically, men died after barely five years of pension experience.
At the beginning of the pension system, no money was saved for payouts. So the pay-as-you-go system was chosen. This means that the pension contributions of today's active workers pay the benefits to today's pensioners as well. No capital is built up. Nothing is saved. This principle still applies. One third of the payments are financed by contributions from employees. One third comes from employers' contributions. The last third comes from tax money. However, this share is getting bigger and bigger.
The system in Germany has had one cardinal flaw from the very beginning. The pension insurance has remained a system of social status up to this day. Older, already existing pension systems were initially left in place as far as possible. Thus, a pension fund was created for blue-collar workers, white-collar workers, civil servants (in fact none), the self-employed (in fact none, unless there was already professional insurance, such as for doctors or lawyers), as well as a whole series of traditional professions, such as the miners' insurance for miners or the maritime insurance. From a legal and insurance point of view, the statutory old-age pension scheme was a work of the century, conceived for generations.
Until politicians, especially after the Second World War, came up with the idea of buying votes with alleged improvements to old-age pensions. Since then, old-age provision has been the toy of political parties and lobbyists, so far mainly at the expense of current pensioners. There is no desire to constantly increase contributions. The aim is to spare employers the burden of social costs. So the benefits for pensioners were reduced from about 75 per cent to about 48 per cent of their last income today. The system of social status promotes inequalities. On average, civil servants receive more than twice as much in retirement benefits as pensioners in the private sector.
In the last 130 years, however, the conditions for old-age provision in society have changed drastically. Everything is in flux. Learned profession and actual activities drift apart more and more often. People change locations in order to find work at all. People constantly have to improve their qualifications. Family reasons interrupt the continuity of contributions. People work abroad for longer periods. Continuity in the individual income history for around 45 years of work is no longer guaranteed.
Despite various adjustments and reforms, the statutory pension insurance is too rigid and inflexible to cope with the dynamic changes in the world of work. The costs of old-age provision according to the pay-as-you-go model are foreseeably no longer sustainable. Therefore, old-age provision needs to be supplemented by the employees' own taxed net income. This is unacceptable for workers. Riester and Rürup pensions (The terms "Riester" and "Rürup" stand for two pension supplementary laws from around the year 2000. They were intended to regulate private old-age provision from taxed net income and make it attractive to save money. The Riester Act was for non-self-employed workers, the Rürup Act for self-employed workers. However, both laws fell far short of their goal) have only been an attempt and have never really taken off. Too intransparent, too bureaucratic, too inflexible.
At the national level, there is a need for a comprehensive old-age provision programs on several complementary pillars:
- The abolition of the system of social status. Everyone who earns income from work must first contribute to the one state pension system. Even if this means that lower contribution rates have to be temporarily applied on a staggered basis for low incomes (such as for the self-employed).
- There must be a central fund for all voluntary occupational pension schemes into which all contributions flow, regardless of which employer one is with. The fund should be gilt-edged and managed by a trustworthy body, such as a special department of the central bank. These pension savings must be tax- and social security-free for all participants in the accumulation phase.
- It must be possible for every employee to make special payments into the fund free of tax and social security contributions. This must also apply to the settlement of time credits for pension savings in companies.
- The age limits for retirement must be made much more flexible. This applies to an early pension just as much as to a late pension. Why shouldn't the individual decide when to retire after a certain pay-in period. The legally enforced forced exit from working life must be abolished. The desire for a longer or shorter working life should be realisable. This goes hand in hand with the generally much longer life span.
- Entirely personal old-age provisions such as endowment insurance, real estate acquisition, fund savings or even simple savings should not be subject to flat-rate social security contributions if these assets are verifiably used for retirement.
- Capital formation contracts for the purpose of later annuitisation may not be subject to contract brokerage commissions or fees.
- Finally, there must not be cut-off date-related taxation of securities whose values are subject to constant price fluctuations if the purpose of the liquidation of securities is to annuitise them here as well.
- The system must be transparent, understandable and comprehensible for everyone. Annual information on the entitlement status at different ages in the future from all insurance providers is indispensable.
A large number of these measures could be easy for a legislator planning for the long term, provided there is political will. The core of the existing pension system would remain in place. The asset protection of occupational and private pensions would become more attractive and people could gain more security and freedom in their very personal life planning.
Incidentally, it is an indictment that work has not long been done at EU level to find regulations that would gradually and in the long term lead to a uniform EU pension system. Politicians are obviously not aware of how many people are already choosing their jobs on the basis of where they will be able to claim the most reasonable pensions later on. National pension systems are in any case contrary to the idea of an EU-wide flexible labour market. What is certain, however, is that if a fundamental new start is not made very quickly, first in the national pension system, the younger generations will look for a government that takes their concerns seriously and are acting.
