February 20, 2020
Germany's basic pension reform and its challenges
France is moving towards a universal pension scheme where one euro contributed gives the same right to all. Interestingly Germany is now moving in the opposite direction.
A significant boost in the basic pension was a flagship policy of the SPD that nearly brought the coalition government down last November. In the end the CDU and CSU backed a compromise in the cabinet. Three ministers representing the three parties of the coalition presented a draft law yesterday that promises to spend €1.3bn from 2021 on, to top up pensions for low-income earners. Most of the recipients will be women and many will be from east Germany, where economic uncertainty and lower spending power have contributed to the rise of the far right in recent elections. The qualifying criteria will be 33 years of contributions, raising children or looking after relatives. This could give some people a significant income boost. For example, a hairdresser who worked for 40 years at minimum wage could see their monthly pension rise from €512 to €960.
But, as is the case with all compromises and for pension reforms in particular, the resulting scheme is quite complex, full of conditions and rules with incredible challenges for implementation. The basic pension is to be granted without the need for any application, which puts the burden on the pension provider to decide who is eligible. To assess eligibility, they will have to gather data from the tax revenue office including capital returns and income from abroad. This is far beyond their current capacities.
What is also vague is the financing. According to the draft law the annual cost is expected to come to €1.3bn initially, and rise to €1.5bn by 2025. These are to be financed by tax revenues, though there is not yet a clear basis for this. Jens Spahn hinted at the financial transaction tax, which is not even in place yet.
Another concern is that the complex web of eligibility criteria creates new injustices in the system. Those earning less than €1600 are eligible for basic pensions, but those earning more won't see their pensions rise. Business organisations argue that this is against the principle that the amount of the pension is based on the contributions previously paid. This is the basis on which fairness is assessed.
Germany has its history of pension reforms too. The last one in 2012 raised the retirement age from 63 to 65. A special commission is to present its proposals for another overhaul in March, including proposals to raise the pension age from 65 to 67. Et tu felix France?