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The poisoned chalice?

Germany’s got a new minister responsible for pensions – which is interesting for two reasons. First is the scale of the problem, then there is the minister himself.
Out of the turmoil of the election and the horse-trading behind the grand coalition, the SPD’s Franz Muentefering has emerged in the hot seat.
Muentefering is the man who plunged his party into turmoil when he resigned as party chairman recently and who made headlines earlier this year when he referred to the “locusts” taking over German businesses.
As minister of labour and vice-Chancellor in the conservative CDU/CSU and the centre-left SPD coalition, Muentefering’s relationship with Chancellor Angela Merkel will be key. Also vital will be the relationship with the unruly left-wing of his own party as and the still-powerful and unco-operative unions. Just keeping these balls in the air will be a significant challenge.
He does have ministerial experience, having briefly held the post of minister of transportation and construction in Gerhard Schroder’s first cabinet.
He created a media firestorm in April this year when he criticised Germany’s market economy and called for more state involvement to promote economic justice. This was the speech when he described private equity firms as “locusts”. Although not supported by experts, his views have met with popular support. He is a popular - and populist - figure but no one should underestimate the scale of the task facing him.
The challenge will involve taking forward the progress made under Schroeder’s Agenda 2010 plan and the Hartz IV labour reforms. Whether the coalition has the stomach for this is the key question. The closeness of the election suggested an ambivalent attitude towards the need to change.
The country’s high labour costs and structural rigidities are self-evident - what the IMF calls “persistent disequilibria” - with unemployment running at some 10%. “Germany needs a decisive and forward-looking policy strategy to confront the serious challenges it faces,” says the IMF.
“Germany is at the cusp of a powerful demographic shift and long-run simulations show that public finances and long-standing welfare programmes are not sustainable under current policies,” the fund adds.
It calls for a “coherent plan” to include fiscal consolidation and a shift in policy to reduce labour market distortions. “Raising labour utilisation is important to mitigate demographic pressure on growth and public finances.”
“Reforms will remain primarily a reaction to immediate economic imperatives, however, with limited agreement on effective measures for reinvigorating growth,” says S&P analyst Kai Stukenbrock. “In this regard, the structural rigidities in the labour market, one of the central impediments to growth, have hardly been addressed in the government agenda, due to the ideological differences of the coalition partners.”
The stakes are indeed high, with Standard & Poor’s warning that Germany’s AAA credit rating could be threatened by structural obstacles to employment and productivity growth.
That is the big picture, but what about the minutiae of detail that Muentefering will face? From 2007, the new coalition will probably raise a worker’s contribution to the state pension scheme to 19.9% from 19.5% currently. The press say that this very unpopular step could be avoided, if the new government takes over a requirement from the previous one whereby employers would transfer their share of the pension contribution earlier than usual.
The SPD and CDU/CSU have already agreed to raise the retirement age to 67 from 65. The hike will happen in increments from 2012 and be completed in 2035. Another thankless task that Muentefering faces is telling retirees that their benefit will be frozen next year and maybe beyond that.
The battered state pensions scheme had to be bailed out this autumn thanks to a €600m emergency loan from the government. To avoid a repeat of this, the new government plans to raise its subsidies to the scheme by €2.8bn.
The parties also discussed the possibility of making retirees pay more in health insurance taxes – a hike in the contribution to 80% from 50%.
On occupational pensions, the new government will decide in 2007 whether contributions to the second pillar verision of the so-called Riester pensions should remain free of social taxes beyond 2008. The new government is also to assess demand for second and third pillar pensions for the purpose of deciding whether retirement saving should be made obligatory.
And subsidies for those people who sign up for the third pillar version of the Riester pension are planned. The subsidies amount to a bonus for new-born children, which may total €300 from 2008.

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