The German government has cut €10bn from the state budget earmarked to kick-off the reform of the first pillar pension system through the Generationenkapital – generational capital – concept.

The credit for the generational capital for 2023 has been cancelled to reduce expenditures, the finance ministry said yesterday, explaining the changes made to the original version of the 2023 budget.

The move follows a constitutional court ruling that loans taken for emergency situations and legally by-passing the so-called ’debt brake’ – Schuldenbremse – have to be deployed for that specific situation, and not for other purposes.

The government declared an emergency in 2021 to take credit, by-passing the debt-brake for a series of measures to fight the COVID-19 pandemic in 2021.

It did not use the loan. Instead it was earmarked for the Climate and Transformation Fund – Klima- und Transformationsfonds – for energy transition, an unlawful move, according to the court, that forced the cabinet to rewrite the budget for next year.

“With the [changes to the] budget for 2023, we are drawing the consequences from the ruling of the Constitutional Court. We are not taking on any additional debt this year. In fact, we are taking on less debt,” finance minister Christian Lindner said, adding that the government is declaring another emergency in view of the energy crisis.

The generational capital reform, a flagship of Lindner’s liberal party FDP, would add a funded component to the first-pillar scheme alongside state subsidies and contributions from members.

According to the plan, assets in the funded component are invested in a first phase by the nuclear waste management fund KENFO to stabilise contribution rates and reduce state intervention in the first pillar.

The contribution rate is expected to remain stable at the current value of 18.6% until 2027, and to go up to 20.2% until 2023, according to the pension report for 2023 published by the government.

The level of pension before taxes stands currently around 48.2% of the wage, and will remain just above 48% until 2024, it added.

By 2037, pensions will rise by a total of 43%. This corresponds to an average increase rate of 2.6% per year, it added.

The statutory pension insurance recorded income of almost €363bn last year, after deducting reimbursements and internal compensation payments, above the previous year’s volume of €347.7bn. €275.6bn came from contributions and €86.2bn from state subsidies.

Expenditure amounted to €359.5bn in 2022, increasing by almost €13.1bn (3.8%) compared with the previous year. Expenditure to pay out pensions totalled €322.7bn, up 3.9% compared with the previous year.

The assets in the first-pillar scheme increased to €50.8bn at the end of last year, with reserve growing by almost €3.8bn to around €42.8bn, according to the report.

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