The reform that could make or break Merz
The Chancellor and the SPD have unexpectedly united behind a Swedish-style pension overhaul. Their next challenge begins when it reaches parliament.
Dear Reader,
Good news from Berlin at last.
A few weeks ago, I argued that Germany should stop obsessing over the ever-expanding fortune of the super-rich and start asking how ordinary workers could benefit from the same forces that have made them so wealthy. My answer was a Swedish-style pension system that allows workers to build wealth through the stock market.
Now, unexpectedly, Germany seems set to do just that.
On Tuesday, a government-appointed commission tasked with drawing up a plan to overhaul the pension system unveiled its recommendations. At the heart of them is a proposal for a mandatory funded model based explicitly on Sweden’s example.
The idea might just save a system that has been dragging Germany into economic ignominy.
The current model remains overwhelmingly dependent on an arrangement developed in the nineteenth century. Workers and employers pay contributions into a common pot, which is then used to finance current retirees.
This transfer-based system worked when a large working-age population was supporting a relatively small number of pensioners. Now, though, it’s broken. As people live longer and are less inclined to have children, the ratio of workers to retirees has become increasingly skewed. Pension contributions have nearly doubled in size since the middle of the last century; and yet the size of pension pay outs keeps shrinking.
Sweden confronted the same problem decades ago. Rather than relying entirely on static transfers between generations, it decided to multiply contributions by investing them on financial markets. The result is that ordinary Swedes, not just professional investors, gain from the growth of stock markets. They might not all be able to afford a motor yacht at the end of it, but they won’t have to fish through bins to collect Pfand (a fee you get for returning beer bottles) — a common sight in German cities that has come to symbolise old age poverty.
If the pension commission has its way, Germany is about to copy that example.
In one of its key recommendations, the commission proposed that every worker should pay a mandatory additional one per cent of their salary into a personal investment account, matched by a further one per cent contribution from their employer. The funds would be managed by state employed stock brokers along Swedish lines.
The commission estimates that the reform could eventually increase average monthly pensions by more than €700.
The only problem with this proposal is that, rather than replacing part of the existing transfer system, it would come in addition to it. Immediately, that would mean that workers will have less netto from their brutto, and employers, already struggling to compete on international markets, will face higher labour costs.
Nonetheless, the proposal represents the most significant attempt to modernise Germany’s pension system in decades.
The recommendations go far beyond the creation of a Swedish-style investment fund. Among 33 recommendations, the commission also proposes linking the retirement age to life expectancy — meaning that today’s toddlers could remain in the workforce until their seventieth birthday; it advocates phasing out early retirement for long-term contributors; and it wants to expand the system to include groups such as the self-employed that currently remain outside it.
Only a few years ago, many of these ideas were politically unthinkable.
Which is why the scene in Berlin on Tuesday was so remarkable.
When the commission presented its findings, its authors were flanked by Chancellor Friedrich Merz on one side and Labour Minister Bärbel Bas on the other.
Over the past year, the two have come to symbolise the stalemate inside the coalition government. Bas, who also serves as SPD co-leader, has publicly accused Merz of talking “bullshit” after he claimed welfare costs needed to be cut. On the centre-right, she is seen as the principal obstacle to the CDU’s economic agenda.
Yet on Tuesday they could scarcely have sounded more alike.
Merz praised the proposals as delivering on “the last unfulfilled promise of Christian social teaching” by allowing workers to participate directly in the profits brought by financial markets.
Bas was no less enthusiastic. The idea of a mandatory investment fund was a “surprising proposal” that she had not been expecting, she admitted. Yet she argued that it would give younger Germans hope of higher pensions and allow poor people in the east of the country to benefit from asset ownership.
Most strikingly, Bas made clear that she viewed the commission’s recommendations as a package deal. Picking individual measures apart, she argued, would undermine the effectiveness of the whole reform.
For a coalition often accused of paralysis, it was an unusually clear display of unity.
The question now is whether that unity extends beyond the cabinet table.
Encouragingly, the commission’s proposals have been well received by the national media. On the centre-left, Der Spiegel called the Swedish model a “game changer”, while the conservative Frankfurter Allgemeine concluded that “there is not going to be a better pension reform than this one.”
And yet, due to the maths of the current Bundestag, only a few backbenchers need to rebel to scupper the whole deal.
Back in December, young members of the CDU threatened to rebel ahead of a vote on maintaining the current pension level — they said that doing so meant piling up debt that future generations would have to pay back. Merz avoided a humiliating defeat at the last moment by promising the young rebels seats on the commission.
In the end, three politicians served on the commission — two from the CDU/CSU and one from the SPD — and they were all under 40. That showed that the government was serious about creating a system that was fairer for young people.
Young CDU lawmakers have expressed satisfaction with the outcome and have said that they want all 33 recommendations to be written into law.
The AfD have essentially given their approval to the commission’s work, claiming that several ideas were stolen from their manifesto — so the CDU won’t be too concerned about pressure from their right flank. Pro-business thinktanks have generally welcomed the reforms, although one institute described the plan to increase employer contributions as “administering poison” to the country’s ailing economy.
If a rebellion comes, it will arrive from the SPD, who face undoubted pressure from the Left to block parts of the reform. Trade unions and the hard-left Die Linke are up in arms about the abolition of early retirement, a concession that was supposed to acknowledge the fact that working-class people often work considerably longer than those who attend university.
Leftists also argue that, rather than making people work longer, the government should stabilise the pension system by requiring more people — including teachers and other Beamte — to pay into it.
There are already signs of nervousness in the SPD ranks.
Karl Lauterbach, health minister under Olaf Scholz, has argued that the proposal fails to address a basic injustice. “High earners pay in for a relatively short time and then enjoy long retirements on generous pensions. Low earners pay in for longer and die sooner, receiving smaller pensions for fewer years," he argued.
Manuela Schwesig, the influential Minister-President of Mecklenburg-Vorpommern, said that she isn’t prepared to accept every aspect of the commission’s work. “I don’t agree with the Chancellor that these proposals should be adopted in their entirety,” said Schwesig, adding that 45 years is enough for anyone to work regardless of how long they are expected to live.
The only problem: if the SPD start to unpick elements of the reform, the CDU will do the same. Then the whole thing will fall to pieces.
The next few weeks will be decisive. If this reform passes through the Bundestag, Merz will be able to present himself as the first great reformer since Gerhard Schröder. That will give him a huge boost going into state elections later in the year. If it falls foul of coalition politics, his time will have run out.