Pension insurance: Bundesbank warns of financial difficulties

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NThere is silence before the storm. In recent years, the financial situation of the pension insurance was not a problem – on the contrary. There was enough money to reduce contribution rates and still be able to expand benefits. But that will change no later than the middle of the coming decade, then threaten the statutory pension to slither into a financial abyss.

This, in any case, calculations of the Bundesbank, which has published in their current monthly report. It has analyzed how contribution rates, pension levels and federal subsidies will develop on the basis of the current legislation, and that by 2070 – so far hardly anyone has looked so far ahead. The conclusion of the experts: Only a further increase in the retirement age can prevent pension financing from getting completely out of hand. However, others certainly see more alternatives.

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The current calm also stems from the fact that the grand coalition has introduced the so-called double stop line this year: the contribution rate must not rise above 20 percent, the pension level should not fall below 48 percent. This will be the case until 2025 – although it is unlikely that these figures will be exceeded or exceeded anyway, as the calculations of the Bundesbank show.

Net wages would fall and VAT would rise

But then it starts. If these guarantees fall away again and from 2025 the old legal situation applies, the financial situation of the pension insurance will change rapidly and radically. This is because from then on, the baby boomers, the baby boomers, retire. At the same time, life expectancy continues to rise steadily. And although the retirement age is gradually being increased to 67 by 2031, this imbalance can not compensate.

As a result, according to the Bundesbank, the contribution rate will have to rise from its current level of 18.6% to around 24% by the mid-1930s, and by 2070 it will have to rise to about 26%. The calculations are based on the average population growth forecasts of the Federal Statistical Office. These increases would be shared equally between workers and employers, so net wages would decrease while labor costs for companies would increase.

Source: Infographic WORLD

At the same time, subsidies from the federal budget to the pension fund would have to be drastically increased. In 2018 this was 83.8 billion euros, which corresponds to about 3.3 percent of the gross value added of the Federal Republic. By 2030, this share will rise to around four percent, to 4.5 percent by 2050 and to five percent by 2070. For example, to raise this money, the state would have to raise VAT from the current 19% to 23.5%.

Despite all this, the supply level would drop drastically. By 2030, it would only be 46 percent, 2050 42 and 2070 40 percent. This pension level depicts the pension entitlement relative to the previous income, based on an employee who has achieved exactly the average income for 45 years. The drop from 48 to 40 percent ultimately means a drop in pension levels of 20 percent.

The pension system will change dramatically

In order to prevent such rashes, the Federal Government has set up a commission to develop proposals for a comprehensive pension reform. It should come into force in the middle of the coming decade, that is, when the double stop lines actually should expire.

Therefore, the Bundesbank has also calculated what it would mean if these adjustments would apply beyond the year 2025. If the pension level is then fixed at 48 percent thereafter, the contribution rate would have to reach the value of 26 percent by the mid-1930s, and by 2070 it would rise to 31 percent. In turn, the federal subsidy in 2070 would amount to six percent of the gross value added.

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And even if the currently valid double stop line is maintained, which also freezes the contribution rate at a maximum of 20 percent, then the federal subsidy would have to climb to 20 percent to 11 percent of gross value added – which currently corresponds to almost the entire federal budget.

But even if the stop lines are given up, all three variables in the system – contribution rate, supply level and federal subsidy – would change significantly. Therefore, the Bundesbank recommends using a fourth control value to relieve the others: the retirement age.

Other experts bring pension at 73 into play

Although this will increase to 67 years by 2031, it should remain constant under the current legal situation. However, it can be assumed that life expectancy will continue to rise. Therefore, the retirement age should be linked to this, the Bundesbank demands.

This would mean that it would have to rise by a quarter of a year each year – so by 2070 it would be 69 years and four months. As a result, the supply level could be stabilized at 43 to 44 percent, the contribution rate would only increase to 24 percent, and the federal subsidy to about 4.5 percent of the gross value added.

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Similar demands have already been made by other experts. The most far-reaching is probably the employer-affiliated institute of the German economy (IW) in Cologne, which already brought the pension with 73 into play. Thus, both pensions and contributions could be kept stable – the latter, of course, is a particularly important concern of employers.

However, the demand of the Bundesbank differs from that in that it does not name a specific age. On the contrary, the retirement age should depend on the development of life expectancy. If this does not continue, it can stay with the pension at 67.

Pension finance benefited from the employment boom

However, there are also members of the Federal Government Commission who have very different priorities. For example, the Federation of Consumer Advocates calls for a fundamental reform of old-age provision. The Riester pension does not work, mainly because of the lack of quality of the products and the placement services. Instead, a simple, inexpensive and high-yield standard product should be introduced on the Swedish model, which is managed by the state.

Others, such as the Federal Association of Workers' Welfare, point out that the forecasts of the past have been missed. In 2003, for example, an increase in the contribution rate by 2020 to 20.2 percent was predicted. Instead, it now stands at 18.6 percent, despite the performance gains of the past five years.

Nevertheless, it would be negligent to assume that the current forecasts would be too pessimistic again. Although the Bundesbank itself points out that these are not point forecasts, but simulations with many assumptions. In recent years, however, the development of pension finance has been so positive only because Germany has experienced a year-long boom in employment. It is highly unlikely that this will last another 50 years.

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