Collapse of German government coalition turns back clock on pension reforms

The collapse of Germany’s so-called traffic light coalition – social democrats (SPD), Greens and the liberal party (FDP) – brings to an abrupt end the ambitious plan to reform the three pillars of the country’s pension system that started at the beginning of the legislative period, with decisions expected by a new functioning government after a general election based on potentially different pension policies.

The government has spent the past few years drafting a law to stabilise the level of pensions and set up a fund for equity investments in the first pillar, a law to strengthen the second pillar’s occupation pensions (Betriebsrentenstärkungsgesetz II), and a law to introduce savings accounts in the third pillar, to strengthen the capital-funded component of the retirement system through fragile compromises and long consultations with stakeholders.

The cabinet had on its agenda a vote to approve the draft law proposed by the finance ministry to reform the third pillar private pensions in mid-November, IPE understands.

“My expectation would be that the [reform] projects stop for the time being and will not be implemented,” Johannes Geyer, deputy head of the department of public economics at think tank DIW Berlin, told IPE.

The liberal party spearheaded two main changes – the equity fund in the first pillar and establishing savings accounts with lower guarantees for private pensions – those now hang in the balance after chancellor Olaf Scholz sacked finance minister and head of the FDP Christian Lindner, causing a government reshuffle.

Jörg Kukies, most recently state secretary in the Chancellery, and close to chancellor Scholz, will succeed Lindner as finance minister.

Lindner had in mind fundamentally different policies to revitalise the German economy, with billions of euros in tax cuts for the few high earners “and at the same time pension cuts for retirees, that is not decent and fair,” Scholz said in a rare emotional speech last night referring to the programme for a new era of economic growth in Germany, called Wirtschaftswende Deutschland, drafted by the former finance minister.

The chancellor promised in his speech that in the remaining sessions of this year, until Christmas, the Parliament (Bundestag) will vote on draft laws that “will not tolerate any delay” but include only the law drafted to stabilise the first pillar pensions among the three to reform the country’s pension system.

Scholz intends to govern for now with a minority government, supported only by the SPD and the Greens – a way that makes it difficult to find majorities on reforms with parties having different views on pensions.

The chancellor plans to hold a confidence vote in Parliament on 15 January, with new general elections potentially held in March.

Marting Werding, a member of the German Council of Economic Experts, a body advising on economic policy, thinks that decisions on a reform of the first pillar, which is necessary in view of an ageing population and baby boomers retiring, will now likely only be made in the next legislative period.

“The future of the draft laws to reform the second and third pillars, which were less controversial in the [governing] coalition, is more uncertain. The legislative processes for both the second and third pillars have not progressed to such an extent that they can be passed in Parliament before upcoming new elections,” he said, adding that is almost certain that a new government will revisit plans to reform the second and third pillars.

The chief executive officer of the German fund association BVI, Thomas Richter, told IPE that a third pillar reform cannot wait.

“The savings account was heading in the right direction and has received strong approval from experts and the public. With this reform, Germany would catch up internationally,” he told IPE.

Hanne Borst, head of retirement at WTW Germany, said the law to reform the second pillar contains several measures, such as strengthening the social partner model, supporting low-income earners and providing incentives to work longer, also included in the CDU’s party programme.

“There could be consensus on at least some points. Whether and how these points actually find approval in Parliament depends very much on the further behaviour of the parties involved, in and outside government,” she added.

Borst noted that it remains to be seen whether the package to reform the first pillar will be passed by Parliament as it is, or with changes.

The Union, the alliance between the Christians Democratic Union (CDU) and the Christian Social Union (CSU), is now in a strong position, leading in the polls with 34%, followed by the far-right party Alternative for Germany (AfD) with 17% and the SPD 16%.

The CDU has in the past criticised the first pillar reform package (Rentenpaket II), wants to link longer working life with life expectancy, and favours automatic enrolment in third pillar pensions that lead to offering standard products through a public fund.

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