German retirement system leads to pensioner poverty
A new OECD study shows that elderly people in Germany are more poorly protected against poverty than in other countries. The German retirement system will have to be changed.
The Organization for Economic Cooperation and Development (OECD) has analyzed the retirement systems of 34 industrial countries, and presented the findings of this international comparison in Berlin on Tuesday.
Germany, a role model in many social sectors, landed in the middle of the pack in this category. That means that other countries have found better solutions for taking care of their citizens as they age.
OECD retirement expert Monika Queisser knows where the problem lies with Germany's retirement system. "One hundred percent orientation on income means that there is hardly any redistribution for those who are socially vulnerable. Switzerland, New Zealand and the Netherlands have better regulated their systems for those with low paying jobs or physical disabilities."
Systematically disadvantaged in Germany
Pension poverty is becoming a reality for more and more Germans
Pension levels in the federal retirement system in Germany correlate directly to the amount of income earned throughout one's career. The general rule is: Those who earned a lot while working automatically had larger amounts of money deducted from their paychecks, thus have paid more into national retirement funds over the years, and so receive higher retirement payments as seniors. Those who earned less, paid in less, and so must be able to finance their lives with much lower, state pension payments when they retire. Knowing that, low wage earners need to put money away toward retirement on their own. The catch is that most people in this situation do not have money to put away at the end of the month. Their only choice is the federal retirement system. For hard luck cases, such as the longterm unemployed, only nominal social welfare payments are available.
Switzerland, New Zealand, Denmark and the Netherlands have taken a different approach. They use a base pension. The idea is that a fixed amount of money is guaranteed to every citizen, no matter how much he or she earned throughout their career. The level of such base payments are generally lower than average monthly pensions in Germany, but a guaranteed fixed rate is more effective in protecting the socially vulnerable from poverty in old age.
In the OECD's opinion, one practice in particular seems to have proven its worth; namely, the calculation of pensions based on the best 35 years of a person's career. Periods in which a worker was unemployed, earned less, or was ill, are not figured into the equation. Countries that design their retirement systems toward social equality, or toward a taxpayer funded pension for all, offer their citizens much greater security against old age poverty than those that don't.
Countries like Great Britain, which focus on their citizenry's personal initiative and bet on commercial rather than state-run retirement funds, drive up the risk of old age poverty among the population. And demographic developments only aggravate the situation. People in Western industrialized nations, such as Japan and Germany, are living longer. At the same time, birth rates are declining. Thus, a basic problem arises: fewer and fewer workers have to pay for more and more retirees. As far as the OECD is concerned, that cannot go well for long. Their prognosis: Future pension levels will sink drastically, despite adjustments to the system. "Young people absolutely underestimate this development," explains an OECD spokesperson.
Working until old age will be unavoidable. According to the OECD study, employment rates among 55 to 64-year-olds have gone up by seven percent over the last ten years: Employees in Korea, Mexico, Iceland and Japan remain in the workforce longest; men in France and Belgium leave earliest, as do women in the Slovak Republic, Poland and Slovenia.
Germany has raised the retirement age from 65 to 67
In order to maintain relatively adequate pension levels for the elderly, half of the OECD countries have either changed their retirement systems or adapted them to current societal developments. Among these developments are increasing numbers of so-called mini-jobs, growing numbers of temporary work contracts and the prevalence of curriculums vitae in which cycles of employment and unemployment quickly replace each other.
In Germany, the retirement age at which a citizen is legally allowed to receive full pension payments was raised from 65 to 67. Other countries lowered pension payments. Things are heading in that direction in Germany as well. The taxation of retirement benefits has already been introduced and the number of pensions that are subject to taxation will go up over the next few years. That will automatically lead to lower pension payments. On Tuesday, Germany's highest court, the Bundesverfassungsgericht, declared the practice constitutionally legal.
Further changes to the retirement system are being discussed in the OECD countries. In Germany, there is talk of requiring the self-employed to pay into the federal retirement fund, much as is the case in the USA. Currently in Germany they are not obliged to do so. Beyond that, the Federal Employment Ministry has drawn up plans for eventually moving away from a contribution-dependent pension system. Countries that have taken this path, now offer not 40 to 50 percent of earlier average income to retirees, but rather 22 percent. Any way you look at it, a very bitter process is already underway for future retirees.