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Tax exemption end will cut pension provision - aba

GERMANY - aba, the German association of occupational retirement, predicts there will be a 20% drop in occupational pension provision from 2009 if employers' tax exemptions on social contributions are withdrawn.

Speaking at the 69th annual aba conference, pension fund experts suggest while around 60% of the workforce currently enjoy the benefits of occupational pension provision, this could reduce and would in turn lead to more people relying on the state pension provision.

Aba says its assumptions are backed by a study into the effects of ending the tax exemption on second-pillar pension contributions.

"Abolition is short-sighted and causes high social costs as fewer people will save in the second-pillar," said Axel Börsch-Supan, director of the Mannheim research institute for economy and demographic change (MEA).

Aside from increased strains on the first pillar, researchers also argue based on their own predictions the government would receive fewer contributions to social insurance and tax than they hope to gain with the abolition of tax exemption.

German government plans to scrap tax exemptions for second-pillar pension contributions have been viewed critically by speakers at the conference.

Dieter Hundt, president of the federal association of German employer representatives, called government proposals to abolish the tax benefits a "grave mistake", adding "the tax exemption has to be kept long-term and without any exceptions".

His bold statements were applauded by the Stuttgart audience gathered to discuss some of the major current issues in German retirement provision including, among other things, include the scheduled end to a tax law passed in 2002 to help strengthen the second-pillar.

Employees can put up to 4% of their salary into an occupational pension provision free of tax and health insurance contribution and, at retirement, the pension paid-out is taxed through the system known as deferred compensation.

This interim regulation will end in 2008 so ABA, employer representatives and unions are in rare unison in their criticism of scrapping the tax exemption as they fear it will lead to a drop in occupational retirement provision.

German social affairs minister Franz Müntefering reacted to this criticism by suggesting the government will look into keeping tax exemption but perhaps replacing it with a different proposition.

"In our view, there is only one follow-up solution [after the abolition] and that is for the government to pay more into the social insurance," Boy-Jürgen Andresen, chairman of ABA's board, said.

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