D.he statutory pension in Germany is headed for a serious financing problem: If the currently applicable guarantees for retirees and contributors were to be continued, the federal budget would run into acute difficulties by the 2040s at the latest – the Federal Minister of Finance would then have to pay around half of his entire budget to the pension insurance transfer so that the seniors continue to receive money on time. This is the result of the scientific advisory board at the Federal Ministry of Economics in an as yet unpublished report, which the FAZ has received in advance.
“That would blow up the federal budget and would not be financially viable even with massive tax increases,” warns the chairman of the advisory board, economics professor Klaus M. Schmidt from the Ludwig Maximilians University in Munich. “The younger generation needs to know what statutory pension they can expect in the future.” In 2019, according to the report, 26 percent of the federal budget went to the pension fund as direct tax subsidies. “This share should rise to over 44 percent by 2040 and to over 55 percent by 2060.” Axel Börsch-Supan from the Munich Max Planck Institute for Social Law and Social Policy was in charge of the expertise.
The stated values would be set if the “stop lines” set by the government coalition of the Union and the SPD were extended until 2025. They stipulate that the pension contribution rate must not exceed 20 percent of the gross wage. In addition, the so-called pension level must not fall below 48 percent; it puts the pensions of average earners in relation to the average wage. If the maximum contribution rate is not sufficient to finance this pension level, the federal budget has to step in with tax revenues.
Stop lines change the load distribution between the generations
The report is highly topical because it has to be decided in the coming election period what will apply after 2025 – and this should also play a role in the current election campaign. In the government coalition, Finance Minister Olaf Scholz (SPD) in particular campaigned for the new stop lines to be set by 2040. They are also changing the distribution of burdens between the generations: previously, the rule was that increasing numbers of pensioners would slow down the annual rise in pensions in order not to overwhelm contributors and taxpayers. The lower limit for the pension level cancels this mechanism.
The Advisory Board for Economists now even doubts whether it would even be possible to continue the previous stop lines: Empirical tax research shows that “under plausible assumptions, the potential for revenue increases would not be sufficient to allocate the additional federal funds necessary to cover the deficit through an increase in income taxation finance ”, so his report.
Specifically, the Advisory Board estimates that income from wage and income taxes could, if at all, increase by 50 billion euros per year – beyond that, higher tax rates would paralyze the economy so much that the effect would be the opposite. A continuation of the existing pension stop lines would require additional tax subsidies of up to 83 billion euros in 2045 and up to 109 billion euros in 2060. “The Advisory Board therefore advises against maintaining the illusion of long-term hold lines in the political discussion “, he writes.
In order to achieve sustainable pension financing, the Advisory Board puts several reform approaches up for debate. It is inevitable to let the retirement age of 2031 follow the general life expectancy. Until then, as decided in 2007, the limit will gradually increase to 67 years. After that, according to the recommendation, the “2: 1 rule” should apply: If life expectancy increases by one year, the limit increases by 8 months. Based on today’s forecasts, an increase to 68 years by 2042 can be expected. If life expectancy falls, however, the limit can also fall, according to the report.
More wages, less additional pension?
However, this alone is not enough to stabilize the system. The Advisory Board therefore presents further reform options – including a particularly striking proposal, a “degressive model”: the more wages an employee earns, the less additional pension they would receive in future for every additional euro paid in contributions. For example, someone who receives 50 percent more wages than a colleague and pays 50 percent more contributions would only receive 40 percent more pension.
A variant is also conceivable in which stop lines continue to apply – but only for a base amount of the pension. For higher pensions, on the other hand, the burden-sharing between the generations would be reinstated. “This leads to a relative appreciation of lower compared to higher pensions and thus also has the effect of reducing the risk of old-age poverty.” The Advisory Board expressly formulates this not as a requirement, but as a contribution to the discussion. He urged, however, “to have this discussion in the political process soon”.
In March 2020, a pension commission set up specifically by the government also presented reform proposals. They only provide for minor modifications to the system of stop lines through so-called corridors, without limiting the risk for the federal budget: The contribution rate should therefore be between 20 and 24 percent in the future, the security level between 44 and 49 percent. Börsch-Supan, who had also been appointed to the commission, gave up his mandate prematurely at the time in protest: The group had avoided uncomfortable facts – and thus from solutions that could instill new confidence in the younger generation.