German economists warn of pension crisis, call for urgent reform

In the debate surrounding the German pension system, a group of economists has warned of a "dramatic demographic challenge" and called on politicians to implement reforms. "A comprehensive reform of the German pension system is inevitable. So far, the difficult decisions have been postponed until the future, which, however, only exacerbates the problem," states a paper published Friday by the group, led by Marcel Thum, Director of the Ifo Institute in Dresden, and Martin Werding, the economist.

‍

Specifically, in the report commissioned by the Friedrich Naumann Foundation, the researchers advocate for abolishing the retirement age of 63, linking the retirement age to life expectancy, strengthening the sustainability factor, and adjusting existing pensions for inflation. A "combination of the four approaches" is necessary. 

‍

Only such a comprehensive package could stabilize German pension insurance spending at around ten percent of the gross domestic product by 2050, the researchers write. Otherwise, the costs of statutory pension insurance could rise to more than eleven percent. "In 2020 prices, this means that 162 billion euros more will be needed to finance the pension system in 2050 than in 2019."

‍

In this case, the pension contribution rate for employees would rise from the current 18.6 percent to 22 percent by 2050, a rise of 3.4 percentage points, the authors warn. In addition, the annual federal subsidy for pensions would increase from €100 billion in 2019 to €154 billion.

‍

"Without corrections, demographic trends would lead to a significant increase in labor costs or a noticeable decrease in net wages," the report states. "The consequences of this development would be worsening business conditions and reduced disposable income for workers." The costs of rising life expectancy would thus be "unilaterally passed on to younger generations, worsening the competitiveness of the economy and jeopardizing the financial sustainability of the statutory pension system."

‍

‍

The measures proposed by the authors, however, could "share the costs of aging between the generations." The increase in the contribution rate could thus be contained to 19.5 percent by 2050. "This would mean an increase of 2.5 percentage points lower than without the reform package," the economists write. Study author Thum told the "Rheinische Post": "Without reforms, the contribution rate in statutory pension insurance threatens to rise from 18.6 percent to 22 percent by 2050 – with serious consequences for employees and companies."

‍

Finding a viable pension policy concept is one of the most important goals of the Christian Democratic Union (CDU/CSU)-Social Democratic Party (SPD) coalition. In the coalition agreement, the CDU/CSU and SPD guarantee a pension level of 48 percent; the retirement age is to remain at 63. However, this increases cost pressure on the pension insurance system.

‍

Before his appointment as Finance Minister and Vice Chancellor, SPD leader Lars Klingbeil had already proposed a "real reform" of the pension system, including an expansion of the group of contributors. The federal government intends to pass the first parts of its pension package in the cabinet before the summer recess. Social Affairs Minister Bärbel Bas (SPD) is planning a comprehensive pension reform for this legislative period. Economics Minister Katherina Reiche (CDU) recently proposed a longer working life.

‍

‍

CDU General Secretary Carsten Linnemann also wants to reduce the number of civil servants in the long term as part of the pension reform. "I only want one thing: that we only employ civil servants where there are truly sovereign duties, such as police officers, judges, public prosecutors, tax officials, customs officials – but then at some point that's enough," he told Linnemann on Thursday evening at the Crafts Day in Paderborn, according to "Bild." He added that "not everyone in the ministries needs to be made a civil servant, and by the way, not even in the administrations." According to the Federal Statistical Office, in 2023 the state spent around 86 billion euros on pensions, survivors' benefits and allowances. 

‍