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Falling (further) behind

“Pensions are safe”, Germany’s one-time pensions minister, Norbert Blüm, famously said in the 1990s. That ill-judged statement still influences discussions about the German state pension system even today. And, of course, no pension system is truly secure, as Professor Bert Rürup, a former economic adviser to the federal government, said at last month’s German pension fund association conference.

Having spent much of the 2000s tightening its belt to make its social security and pension system more secure, Germany is one of the few countries to now contemplate cashing in its hard-won pension reform chips. Now it is to lower its pension age to 63 for certain workers, as part of a pension reform programme negotiated between the Christian Democrat and Social Democrat grand coalition. This comes in tandem with an agreement to extend greater old-age pension credits to mothers with respect to time spent outside the labour force in childcare, and two other measures, including improvements to disability pensions.

The measures come at a cost of more than €30bn in the current coalition term, according to figures from the German cabinet and, according to Prof Lars Feld of Freiburg University, will cost a cumulative €160bn by 2030. Extending pension rights to mothers for childcare alone is priced at €6.5bn per year.

Instead of increasing incentives for earlier retirement, the OECD has called on the German government to focus on poverty-reducing measures. And according to Feld, this programme represents no less than the biggest increase in scope of the German state pension system since the days of the post-war chancellor Konrad Adenauer. Pension reforms are so hard-won that to surrender them voluntarily looks like folly.

How did it come about that reform-minded, prudent Germany would even contemplate lowering the retirement age when all the trends are towards longer working lives and greater funded pensions? The answer is, of course, political expediency and these measures are the result of an unpalatable political deal between left and right, which also sets a poor example to other European countries in dire need of reforms. Both parties, of course, have their eye on the votes of retirees and those approaching retirement.

In the early 2000s, German reforms boosted funded pensions by creating the Riester and Pensionsfonds vehicles. This, Feld says, put Germany on the route to a Swiss-style funded pension system. But Germany is extremely far behind Switzerland in terms of funded pensions. Switzerland introduced a compulsory occupational pension system in 1985 – almost two decades ahead of Germany’s Riester reforms – and has funded pension assets amounting to nearly 113.6% of its GDP, according to the latest OECD figures. Germany’s asset-to-GDP ratio stands at 6.3%, by comparison.

The 2013 Melbourne Mercer Global Pension index puts the difference more starkly – Germany scores 58.5 overall, compared with Switzerland’s 73.9. (Denmark, the leading country, scores 80.2.)

Switzerland’s Altersvorsorge 2020 pension reform programme compares much more favourably with Germany’s coalition deal to improve pensions, even though the Swiss people themselves have reduced the long-term sustainability of the system by voting in a referendum earlier this year to restrict EU immigration. Although the programme still contains many controversial elements, the checks and balances of the Swiss political system look set to keep the reforms on track. Tough decisions remain to be taken.

Now Germany is considering the facilitation of compulsory supplementary pensions through sector labour agreements. Some such agreements, in the metal and chemical sectors, already allow for this on a voluntary basis. But it is hard to see why German employees should opt to pay both supplementary pension contributions and contribute to the cost of the coalition’s new pension reforms. Like Norbert Blüm in the 1990s, it is easy to make one or other political claim about pensions. And it is also easy to defer the cost of today’s promises to future generations. It is less easy to forge a real consensus about the political and fiscal parameters of retirement policy.

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