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"Oaths are but words, and words but wind," wrote the English poet Samuel Butler, and it seems as if he was writing about German social politics.

German policymakers never tire of telling us that they want to support the development of occupational pensions. But in the event their decisions are achieving the exact opposite. And it has been like that for decades. For the past 20 years we have seen governments promise to support company pensions during successive election campaigns, but within months of being elected they undermine the tax framework.

And this year we will see whether the pre-election pledges have once again been nothing but wind when the government announces whether it still intends to raise the costs for deferred compensation (Entgeltumwandlung) in 2009 by 20% for both employees and employers and thereby trigger the end of deferred compensation for low- and middle-income workers.

It is time to stop fooling ourselves about German social security, it is time to face reality. The state pension will not pay for the retirement most people hope for. That is why future retirees are in desperate need of better occupational pensions. Therefore, increased occupational pensions have been at the heart of German pension reforms since 2001 as governments have sought to meet the challenges of the ageing German society.

Company pensions will have to contribute towards building a healthy retirement income, otherwise welfare will have to step in to fill the growing gap between last salary and the first social security cheque.

What makes the situation especially serious is that in future social security will become a less important source of retirement income. The upcoming reform of raising the retirement age to 67 will add to this problem. Social security today provides benefits equal to 85% of total retirement earnings for the average pensioner. But the replacement rate will decline in future.

It is therefore encouraging that occupational pensions have experienced something of a renaissance in recent years. A good 60% of all employees are now entitled to occupational pensions, up from 50% six years ago.

What looks like slow progress was in fact a rapid paradigm shift. Coming from a world where state pensions were able to secure the standard of living of pensioners it is difficult to understand that times are changing.

The lack of financial education was been another problem. However, employees have learned their lesson. Statistics show that 25% of all occupational pension promises are financed by pure deferred compensation. Another 25% are financed by matching contributions but 50% are still financed solely by the employer. More and more trade unions realise that it will be essential to increase occupational pensions.

Since the 2002 Riester pension reform, employees are permitted to contribute 4% of their individual salary up to 4% of the upper income limit for social security, which in 2007 was €2,520 a year, via deferred compensation to an occupational pension scheme.

The contribution is free of taxes and social contributions. As a result, employees pay significantly less in tax and social contributions on compensation received in the form of deferred pension benefits than in the form of wages.

In particular, the saving on social contributions makes participation lof low-income workers affordable. The costs for statutory pension insurance, statutory health insurance, statutory long-term care insurance and unemployment insurance (which are paid by the employer and employee) amount to 40% of a gross wage up to €63,000 a year. These saving incentives during the accumulation process are essential for low- and middle-income workers.

Pensioners have to pay taxes on their monthly income. Until 2004 all recipients of occupational pensions with statutory health insurance had to pay 50% of the regular contribution rate of statutory healthcare and long-term care insurance. Since 2004 they have had to pay the full contribution rate, which is about 15-16% of the average occupational pension.

Occupational pensioners are paying about €4.5bn a year into the statutory healthcare and long-term care insurance and so the government has already made it less attractive for employees to participate in deferred compensation plans. And by 2009 it will be absolutely absurd for low and middle-income workers to pay into occupational pension plans.

The exemption of salary converted into pension contributions from social security contributions is due to expire at the end of 2008, so that both occupational benefits and deferred compensation will be fully liable for social security contributions. The government hopes to get an extra €2bn of social taxes this way. It is obvious how employees will react. They will stop their deferred compensation and invest in less efficient ways of creating private pensions in the third pillar because their benefits will be free of social taxes.

But occupational pensions are efficient and safe. They create a win-win-win-situation to the benefit of the employee, the employer and the economy. But that is something the government seems to want to ignore.

From the employees' point of view the efficiency is based on pooling both longevity and investment risk and the creation purchasing power as well as reducing expenses.

For employers, well-managed pension plans, which can be DC as well as DB, create value. Such plans also encourage continued employment which helps lower turnover costs and retain intellectual capital. Due to the demographic challenges faced by labour markets, well-designed occupational pensions will help attract qualified staff. And last but not least, an economy benefits from good occupational pensions as they help to lower direct and indirect labour costs.

In for a penny, in for a pound says an old proverb. In the case of Germany's deferred compensation this means that, after promoting the idea of letting employees share the expenses of occupational pensions, the system has to stay free of social security contributions during the financing period. There is no way that employers will step in to shoulder this financial burden.

Besides, the system needs additional reforms. It is necessary to make the financing mechanisms more flexible, to help those companies that want to externalise funding and reduce risks. Now is the time to show how serious the German government is about promoting occupational pensions. Now is the time to show that oaths are more than just words.

Klaus Stiefermann is secretary general of ABA, the association of company pension schemes

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