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Special Report

ESG: The metrics jigsaw


Germany’s PAYG reserve falls to new low

GERMANY - The sustainable reserve for Germany’s state-run pay-as-you-go pensions scheme hit a new low in April, sparking fears that the reserve may be too small to cover estimated deficits for this year and next.

Under German law, the reserve must equal at least 20% of monthly expenditure for the PAYG scheme. The government currently spends around €15bn on the scheme.

However, according to the federal insurance office, which helps administer the PAYG scheme, the reserve shrank to a new low of 9% of the monthly expenditure, or €1.5bn. This compares to 32%, or €5bn, in January.

Meanwhile, the German social affairs ministry estimates that the PAYG scheme will have a deficit equalling €1.5bn in 2005 and €3.5bn in 2006. In theory, the payroll tax for the PAYG scheme would have to be raised to 20% from 19.5% currently to cover the deficits.

Yet as social affairs minister Ulla Schmidt has ruled out an increase in the scheme’s tax – shared equally between employees and employers – the ministry plans a bit of budget manoeuvring.

Dagmar Reitenbach, spokeswoman for the ministry, confirmed that the government would require employers to forward their share of the scheme’s tax two weeks earlier than usual, from January 2006. Pension experts estimate that this will lead to €400m in additional costs for German employers.

Reitenbach also said the ministry would, earlier than usual, tap a €61bn subsidy for the PAYG scheme that is provided by the German finance ministry. “These measure should ensure that the monthly contribution to the pensions scheme remains stable at 19.5%,” she added.

Reitenbach also dismissed further estimates from pension experts indicating that the sustainable reserve will continue to hover below the 20% legal requirement this year and next.

“I don’t want to partake in that kind of speculation from pessimists. They said last year that the reserve would be very low, and we ended a year higher than what serious experts estimated,” the spokeswoman said.

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