German pensions reform put back by a year
Reform of German pensions has suffered another setback after the government postponed the introduction of legislation leading to the introduction of private pensions. Private provision will begin in 2002, instead of 2001 as initially planned. Earlier this year the government decided privately funded pensions were to be subsidised and contributions deductible from taxable income but has now decided to change the rate of payment into private systems.
Previously Germans were to increase contributions 0.5% per year from 2001 until 2008, taking final contributions to 4%. Under the new system, Germans will contribute 1% in 2002, increasing 1% every two years until 2008. “This means additional tax revenue for the finance ministry,” says Norbert Rössler, managing director at consultants Buck Heissmann in Wiesbaden.
In contrast there are additional burdens on the social security as a result of the postponement since payments are linked to net salaries. “If you start deducting these premiums to private pensions one year later, the pension adjustment will be higher,” he says.
The government’s official explanation is that it wants further consultation but appears the it is unwilling to make unpopular cuts in the state pension. “We have elections in 2002… it’s a political game and nothing else,” says Rössler. Peter Koenig, executive director at Morgan Stanley in Frankfurt says the delay is not too serious: “There would have been one catch anyway. All these new products and systems would not even have been in place until the middle of the year.”
The postponement adds to the government’s indecision over occupational schemes, something Rössler says is damaging Germany’s reputation as a financial institution. “Other countries are trying to get ready for when the pan-European pension fund is introduced and when the tax barriers are removed. If Germany is not ready nobody will invest their money in German pension fund. On the contrary, German companies will transfer the money in their pension funds and invest it in other jurisdictions,” he says.