Mittwoch, 6. Mai 2009

More on German Pensions

According to press reports, the German government has passed a resolution that pensions can never be cut in nominal terms.

If the pension formula says they should be cut, the cut is postponed until later, i.e. it is netted off with future pension increases. Not that noticeable pension increases are terribly likely anyway, unless inflation picks up sharply:

During 2004-2008 (i.e. for 5 years), pensions increased by 1.65 %. Not per year, in total: There was no increase at all in 2004-06, 0.54 % in 2007 and 1.1 % in 2008.

During the same time, consumer prices increased 10 %.

In other words:

It took only 5 years for purchasing power to be eroded by 8.3 %.

And don't forget: In recent years, the number of pensioners hasn't increased all that much. The aging process will accelerate dramatically after 2010.

So pensioners will be lucky if the purchasing power of their pensions doesn't drop by more than 1-2 % p.a. (I'm assuming inflation will be at least as high; if it isn't, financing constant nominal pensions will be rather difficult.)

It won't be funny for the pensioners, and it will lead to rapidly swelling numbers of welfare recipients. But nothing much can be done about it, unless Germans decide to have a lot more kids (and even if that ever happens, we need to wait for 20-25 years until those kids finally start working...).

( Previous post on same subject )


  1. While the purchasing power of the pensioners is likely to fall in case of inflation, it is increasing in case of deflation due to the new rule. So lets hope for modest inflation.

    The problem of the new rule is that it also prevents pension cuts when (not if!) the ratio of pensioners per worker increases. This new rule is virtually unpayable.

    As I argued here cutting pensions is the only way out of country default. That door is close for the time being...

  2. I agree: If there is sustained deflation going forward, the "no cuts in nominal pensions"-approach will be completely unaffordable.

    At a minimum, 1-2 % annual inflation will be necessary for pensions to stay constant in the longer run without rapidly ballooning additional taxpayer subsidies (or much higher contribution rates than the current 20 %).

    It's rather arbitrary to focus on nominal terms anyway: It has no meaning whatsoever that nominal pensions are constant. But most non-economists seem to see that differently...