Why Germany's pension system is failing

Does a blackhole in the pension system explain why Germany is desperate to attract foreign workers?

Have you ever wondered what you are doing in Germany? Where you fit into this well-oiled industrial machine? Well I’ll tell you. You are here to plug a massive gap in the country’s pension system.

Every party in Germany favours some form of skilled labour migration (yes, even the AfD) because they know that without well-paid foreigners contributing to their fragile pension scheme the whole thing will collapse.

German state pensions are based on a system whereby those still working pay the pensions of those who’ve crossed over into the third phase. The more you paid in, the more you got out at the end, a principle known as Teilhabeäquivalenz.

That was a very manageable social contract as long as the baby boomers were still on company payrolls. But, as the plentiful post-war generation makes a permanent move onto the deck chairs of Mallorca, that deal is becoming ever harder to maintain.

Yes, politicians have seen this issue lumbering over the horizon for decades now. But the solution has been one chained to the logic of a four-year election cycle - hide the discrepancy in the tax system!

Reforms of the pension system in the 1990s and 2000s made it progressively easier to make up for the difference between incomings and outgoings by transferring money from the federal budget to fill the gap. This solution necessarily leads to higher taxes on the young, eroding the Generationsvertrag on which the system is based.

Just how big the pension deficit has become is illustrated by the fact that over a quarter of the entire federal budget last year went into balancing out the pension books. That figure of €100 billion is so large it could fund the combined budgets of the ministries for international development, interior, health, families, and education.

On the bright side, things could have been a lot worse.

Economists in the 1990s proposed ditching the whole system, saying it would soon become unaffordable. But successive governments managed to stabilize it by cutting the pension level, pushing up the retirement age to 67, and bumping up the numbers on the ‘paying in’ column.

And that’s where you and I come in.

The second Wirtschaftswunder of the past twenty years has brought an additional 6 million people into the contribution system, many of whom are workers from abroad.

Currently, we’re keeping the ship afloat. Or, just about.

Left-wing politicians, who are keen to win votes in next week’s national election, have made steadfast commitments to maintain contributions and pensions at their current level. They say we just need more of the same: more migration, more women in work, and more of the employed paying into the system.

“We need to ensure that people have good jobs. If we’d make progress on employment of women that would be a really big step,” SPD candidate Olaf Scholz assured everyone during last weekend’s TV debate. 

Economists warn though that betting on strong economic growth over the next few decades won’t cut it. By 2040, half of the adult population will be over the age of 65, adding 4 million people to the ‘taking out’ column, while 3 million fewer will pay in.

Experts at the Institut für deutsche Wirtschaft (IW) have calculated that contributions would have to increase from a current 19 percent of one’s salary (half of which is paid by one’s employer) to 23 percent in 2040 in order to finance Scholz’s commitment.

An independent board of experts for the Economics Ministry recently painted an even gloomier picture. They warned that the amount of money redirected from the federal budget into the pension system (that €100 billion figure) would have to rise from a current 26 percent to 44 percent of the entire federal budget by 2040.

It is interesting that the parties that want things to keep chugging away as they have been also claim to represent the interests of the young. For, while loudly boasting that they’re upholding a system of solidarity, they are silent on the fact that the system has only survived due to the massive annual transfers from the state exchequer.

It should therefore come as no surprise that Scholz has ruled out tax reductions after the election, describing these as “not fundable.”

At least Scholz has one bitter pension pill for party faithful to swallow. He wants to make the country’s Beamter start contributing to the system too.

Back in the good old days public employees had a special status in society. Everyone from postal workers to judges could become a Beamter. This elite club are essentially unsackable, don’t have to make social security contributions, and are assured a generous pension on retirement.

In recent decades, rail staff and postal workers have lost this exclusive status. There are even moves in less solvent Bundesländer to tell teachers that the party is over.

And now the Beamtenpartei of all parties is planning to make all state workers start paying social security contributions!

Bringing state workers into the payment system would make some difference, experts say. But not enough.

The CDU - party of the gerontocracy - have at least been honest about the fact that they can’t guarantee the current level of pension payments. They want to build a parallel pension fund, where the state would pay in for everyone starting from birth. At best, it’s a solution that might pay dividends in 60 years’ time.

Left-wing economist Marcel Fratzscher laments that the CDU have pursued “clientele politics” while in power, gifting the costly Mütterrente to members of society who are not at great risk of falling into poverty. Meanwhile their dogmatic insistence on keeping the Teilhabeäquivalenz in place means that low earners who die younger are getting a rough deal while being at real risk of poverty in old age.

For economists of all stripes though, there is one indispensable lever that can be pulled to create a sustainable solution to the problem.

“In the long term, there is no way around a further increase in the age of retirement,” says Jochen Pimpertz of the IW.

“This has been ignored for a long time - at the expense of the younger generation. An increase in the retirement age to just under 70 is not at all unrealistic,” Fratzscher agreed in an article for Die Zeit in 2019.

On the campaign trail though, this is the one solution that dare not speak its name.

When his own expert commission told him that tying the retirement age to life expectancy was the only way to stop “a shock increase” in pension subsidies, Economics Minister Peter Altmaier of the CDU rejected the advice out of hand. “The retirement age should stay at 67, that’s been my opinion for years,” he insisted.

Olaf Scholz went even further, claiming that the expert commission was inventing “horror scenarios” in order to “impose pension cuts for which there is no justification at this time.”

If the SPD man were to look into the bank transfers his own Finance Ministry makes to the Ministry for Social Affairs every year, one assumes he would come to a different conclusion.