Mittwoch, 29. April 2009

German pensions: A ticking time-bomb?

Is Germany's pension system a ticking time-bomb?

Politicians tell us it isn't. Pension entitlements are based on complicated formulas taking into account the sum of wages paid and the number of pensioners. This will keep pension contributions more or less constant at the current 20 % of applicable salaries.

Sounds to good to be true?

Well, that's because it is. Contributions can be kept at 20 % only if pension age is increased (the standard pension age will soon be raised to 67) and the level of pensions keeps going down relative to salaries. There is no other way: If there are more pensioners per every worker, and the contribution rate stays constant, the pension entitlement has to decrease. If the purchasing-power of salaries increases fast enough, this could still mean that the purchasing-power of pensions stays flat, which wouldn't be too bad. Unfortunately, real wages haven't increased during the last few decades, and they are unlikely to increase all that much in the future (in my very humble opinion). Which can only mean one thing: Real pensions have to go down. And quite a bit.

Do they have "leeway" to go down? In other words: Are they high enough for an average pensioner to have a reasonably comfortable standard of living? Let's see what Deutsche Rentenversicherung's data can tell us:

This page informs us that the monthly "Standardrente" (standard pension) is currently 1,088 € (in West Germany).

"Standardrente" sounds like everyone can expect to get at least that, right? Well, maybe that interpretation is a bit premature: In fact, it's what you receive if you pay in an average contribution for 45 years.

Apparently, not many people manage to do so, because the average pension turns out to be much lower:

According to this page, 24 million people receive pensions, and the total monthly pay-out is 16 bn €. That boils down to an average monthly pension of... 670 €.

If you have neither a company pension, nor savings, nor own a house, how can you live on 670 €? Well, I suppose you can somehow get by (also considering that it's per person, i.e. couples get twice that amount), but the thing is: That's the average pension. Plenty of people get a lot more (as illustrated by the "Standardrente" of 1,088 € based on average contributions for 45 years; if you pay the maximum contribution, you can reach a pension of more than 2,000 €, though I doubt many people manage that), and plenty of people receive less. And for all those living on below-average pensions of 600 € or 500 € or 400 €, any further reduction in purchasing power going forward will be quite intolerable. If they can't live off their pensions anymore, welfare payments will have to fill the gap.

Unless of course something else happens: Whenever the formula implies a particularly hard year for pensioners and an election looms (and don't they always loom somewhere?), politicians will tweak the formula. A few billion more subsidies here, a few billion more subsidies there, and presto, the pain isn't so bad.

Either way, Germany's lack of kids will prove to be costly. Very costly.

1 Kommentar:

  1. Nice post at Nacked Capitalism about pension worries... Germans are not alone...