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Germany freezes state pension for 20m people

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GERMANY - The German government has approved an ordinance that, for the second consecutive year, bars an increase in the state pension drawn by around 20 million people in Germany.

Social affairs minister Ulla Schmidt said: “We currently have a situation in which young people are not seeing their wages increased. Because the state pension follows wage increases, pensioners will not see an increase either” in 2005.

Elaborating on Schmidt’s comments, the social affairs ministry said that in 2004, wages in west and east Germany were up a scant 0.12% and 0.21%, respectively.

The government’s hand was also tied due to demographic changes in Germany, including longer life spans for pensioners, low birth rates and high unemployment, the ministry said.

The ministry added that at least the government had held off on cutting benefits for pensioners.

In fact, pensioners will actually see their benefit decrease this year both due to effect of inflation and a new mandatory charge for health insurance equalling 0.45% of their monthly benefit. Germany’s state pension is to be adjusted for these changes on July 1.

According Professor Bernd Raffelhüschen, an expert on state pensions, the next five years will be characterised by further freezes on benefits and possible cuts - “unless the German economy surprises everyone and gains steam”.

Separately, the finance ministry today reaffirmed its expectation that Real Estate Investment Trusts, or REITs, would be introduced in Germany at the beginning of 2006.

REITs are publicly traded companies that buy, develop, manage and sell property for the benefit of shareholders. Their creation in Germany could, at least in the short term, lead to tax shortfalls for local governments.

Because of this fact, Karl Diller, deputy finance minister, was quoted as saying in an interview with Bloomberg that he doubted that the federal and state governments could agree on the launch of REITs by as early as January 2006.

However, a finance ministry spokesman played down Diller’s remarks, saying: “There has been no change in the situation. A working group (comprised of state and federal officials) continues to meet to settle the relevant tax questions.”

IFD, a German financial community lobby, argues that in the long term, local government could collect €8.2bn in additional revenue due to the invigorating effect REITs would have on the German real estate market. IFD estimates that by 2010, REITs could become a €127bn market.

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