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German first pillar reform ‘could prove difficult for ESG investors’

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Proposed reforms to the state pension system in Germany might change ESG investors’ outlook on the country’s public finances, according to ratings agency Scope. 

The new system would increase the burden of cost on younger workers as more money was spent on retirees, Scope argued in a statement.

“As the proposal stands, the new pension guarantee is set to put an additional burden on Germany’s public finances over the medium-term and represents an important shift in the redistribution of tax revenues from the Baby Boomer generation’s children back to their parents,” the ratings agency said.

Over the summer, the German government presented a proposal to guarantee current pension levels until 2025 and also cap contributions to the first pillar.

However, these changes have already drawn criticism from the IMF.  

Scope highlighted that “the interplay between a country’s old-age dependency ratio and prudent government policy” were “vital in the funding of future pensions and healthcare costs”.

These factors also influenced public debt sustainability, Scope said, and the current proposed changes could “endanger the country’s economic growth potential”.

To fix the intergenerational dependencies, Scope suggested raising the retirement age, changing eligibility criteria, adjusting the contribution rate (currently 18.6% of gross monthly income), or changing the pension replacement rate (fixed at 48% of salary).

The government proposal still needs to pass parliament before it can come into effect.

Scope’s full analysis can be downloaded here.

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