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Germany says shifting from PAYG “insane”

GERMANY - The social affairs ministry has dismissed as “economic insanity” suggestions by the Conservative opposition that the state pensions scheme be transformed from a pay-as-you-go (PAYG) system into a cash-backed fund.

In an interview earlier this week, Paul Kirchhof, the shadow finance minister for the Conservative CDU/CSU, said that due to the disastrous financial shape of the scheme, a Conservative-led government should consider scrapping the PAYG system and replace it with a cash-backed fund.

“We should have done this in the 1970s when it was a lot easier. Still, this has to be long-term option for us,” Kirchhof told the Süddeutsche Zeitung newspaper.

Kirchhof’s idea also got a boost from Günter Oettinger, a CDU prime minister of Baden-Wurttemberg, who told a newspaper today that it could be implemented over 20 years.

This month, the state scheme will have a deficit of €500m and must be bailed out with a short-term loan – the first time in 20 years.

Yet the social affairs ministry, which is in charge of the scheme, said that if Kirchhof’s idea were implemented, “it would ruin the German economy”.

Klaus Vater, a spokesman for the ministry, said this was because the government, to finance current pension liabilities, would need to collect €5,000bn from private households and companies.

“The sum alone is 30 times the total savings rate of private households last year. This alone shows that the idea cannot be financed.”

Professor Bert Rürup, the government’s chief economic adviser, agreed with the ministry that Kirchhof’s idea was not feasible.

Rürup believes that the pension reforms of the current centre-left government are “the right solution, as they created a mix of state, corporate and private pensions.”

The current government has two major pension reforms to its credit. The first one, engineered by former Labour Minister Walter Riester, gave rise to second- and third-pillar pensions in Germany. The second, known as AEG, reduced the maximum state benefit from 2030 and created a private pension for people not covered by the state scheme.

Like Rürup, CDU/CSU chancellor candidate Angela Merkel has ruled out Kirchhof’s idea. She has said that if she wins the election on September 18, she will do more to boost the second and third pillar.

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