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IMF questions German coalition government pension measures

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The International Monetary Fund (IMF) has indirectly criticised Germany’s coalition government’s pension reform plans, saying there were better ways to support adequate replacement rates than the measures it has pledged.

The deal struck by the CDU/CSU and the SPD parties earlier this year included measures to cap the pension contribution rate at 20% and set a floor on replacement rates at 48% of average salaries until 2025.

In its 2018 Article IV Consultation report on the country this week, the IMF said this was not expected to have a large fiscal cost up to 2025, but would be burdensome if it stayed in place afterwards.

A more “durable and growth-friendly way” to achieve adequate replacement rates, according to the IMF, would be to pursue pension and labour market reforms that would make it more attractive for people to extend their working lives.

These would have multiple benefits, including lowering risks of old-age poverty, lowering the public pension bill, increasing growth, and reducing the need for workers to save, it said.

The German government has installed a pensions committee to develop a plan for the state pension system from 2025 onwards.

The IMF's headquarters in Washington DC

The IMF’s headquarters in Washington DC

The IMF noted that public pension expenditure in Germany is expected to rise by 1.9% of GDP between 2016 and 2040, compared with an average increase of 0.8% in the European Union. Pension replacement rates were projected to decrease.

Earlier this year consultancy Willis Towers Watson said contributions to German occupational pension plans would need to double to compensate for falling payout levels from the first pillar.

Gesamtmetall, the employer association for Germany’s metal industry, said the IMF’s recommendations – not just on pensions – were “in nearly every detail diametrically opposed” to the coalition agreement.

The IMF also recommended that Germany improve pension transparency, including as a possible means of reducing household “precautionary” savings.

Improving the transparency of future pension payouts at the household or individual level would reduce uncertainty about future pension income and could help reduce precautionary savings, it said.

Article IV reports are produced after bilateral discussions are held, usually every year, between the IMF and the fund’s country members.

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