The German government is to order a commission to review the way it taxes state pensions as a matter of urgency following last month’s constitutional court ruling that the current tax on the state pensions system is unfair.
The constitutional court upheld a complaint from a retired civil servant that civil servants were unfairly taxed on their pensions, as pensioners from other sectors only pay tax on part of their pensions, not all, like civil servants. This is because non-civil servants pay tax on their pension contributions before they retire.
Peter Koenig of Morgan Stanley in Frankfurt says the ruling was a very prudent move. “The main question is what will the government make of it. Reading between the lines, it could be seen as a quiet move to introduce uniform pensions taxation across all pillars.” If this does happen, then Pensionskassen, Pensionsfonds, insurance funds and the new Reister products would all be taxed in the same way, he says. “As it is an election year, pensions taxation is likely to become a political issue.”
Others think that it is too early to assess the ruling’s impact on the country’s pension system, which has been under going a mini-revolution recently, since the court hasn’t actually published the reasons for its decision. “This is the real thing to watch for. The ruling itself is less important than the reasons behind it,” says Siemens Financial Services spokesman in Munich, adding that the government only has four years to revise and implement reforms to the pensions taxation.
However, an article in the newspaper Handelsblatt says that though the court ordered the government to start changing the system by 2005, it did not determine the length of any transition period to a new system. And Professor Bert Rürup of Darmstadt Technical University, one of the government’s independent economic advisers, says that the decision will not have a significant impact on the country’s pensions reform and it does not mean the government needs to introduce delayed taxation on pensions, even though this would be consistent with its aim of moving towards the increased use of private pensions.
According to Handelsblatt, the government said that it would have the results of its review by the end of this year, with draft legislation to follow early next.