Pension provision is hogging the political limelight in Germany and private pension firms are queueing up to fill an expected multi-billion-mark void in a country which otherwise has no hope of meeting retirees needs.
Debate on the issue is centred on whether or not the current system, which is dominated by pay-as-you-go government schemes, will have to be supplemented with a funded pension system and just how this could be brought about.
Thomas Mayer, senior economist at Goldman Sachs in Frankfurt, says: In view of Germanys dire demographic outlook, a move to a funded pension system is inevitable. The only question is how this should be organised.
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Germans are getting older and fast. The German post-war baby boom peaked in 1965, with 367,000 more births than deaths.
In 1975 there were 149,000 fewer births than deaths, while in 1990, which includes the former East Germany, there were 12,000 fewer people born than deaths.
The number of Germans aged over 65 is set to rise to 20 million by 2030, up from 12.5 million in 1996, out of a population of 80 million. As it currently stands, retirees receive a pension equivalent to just over 70 per cent of their net wage income, after 45 years of contributions. Actuaries forecast that contributions would have to increase to 25.5 per cent from 20.3 per cent currently by the year 2040 to maintain these levels.
The German pension system is split into three parts. The mainstay of the current system is the state pension, which accounts for 70 per cent of total pension payments. After this come company pensions, 19 per cent of the total, and private pension provision, generally using the life insurance vehicle, which makes up the remaining 11 per cent. Company pensions function as defined benefit schemes, where a firm promises an employee a pension from its own company income stream. The company then builds up reserves on its balance sheets to pay pension liabilities.
But these payouts depend on the health of the company and the health of the economy and as the population ages, available pension funding will inevitably decline as the number of wage earners falls and those dependent on them falls.
As the company pension system stands, it can be difficult to transfer benefits between companies a serious problem in an age of increased mobility of labour. As the largest provider for future retirement, the initial responsibility for finding a solution for Germanys pensions crisis lies in Bonn.
A coalition policy group said recently that Germany needs to cut pensions, raise contributions and set up a tax-financed family fund to keep its state pensions scheme going into the 21st century.
The pensions commission recommended cutting pensions to 64 per cent of average net wages by the year 2030 and raising contributions to 22.9 per cent of wages over the same period.
The family fund will allow for some welfare payments like maternity payments now funded by pension contributions to be transferred to the family fund.
Critics of this plan say that in a high-unemployment environment, with little chance of an increase in net wages for a number of years, pension benefits will drop, in some cases close to subsistence levels.
There are also fears that a public pension fund could be prone to political constraints a new government could come in and simply dissolve the fund, for example.
Within the government there are fans of a tax on pensions, including the finance minister Theo Waigel.
This course has been criticised, as analysts fear it could hit already-low German investment levels still further, leading to a hike in jobless figures, currently at post-war record levels, and could boost the black economy.
It (is) in the strong interest of the contributors that the pay-as-you-go system be complemented by privately organised funds, and not by a public pension fund with additional mandatory contributions, says Goldman Sachs Mayer.
Proposals by the Bonn tax reform commission do not contain tax incentives for saving for a private pension, such as those seen in Britain or the United States.
Long-term, however, most analysts see no option to secure retirees future income other than introducing tax relief on contributions to private pension plans.
Evi Vogl, of Hypo-Banks fund wing, Allfonds, in Munich, agrees. The conditions for private pension provision have to be improved, particularly tax conditions, to encourage a balanced system, she says.
Phillip de Christo, managing director for Continental Europe at Fidelity Investments, says: The challenge facing the German government is not that different from that faced by the US government.
The real driver behind the growth of these products in the US was how the legislation was fashioned to make them attractive both for companies and for investors, he added.
While no actual tax relief on savings in pension plans seems to be on the cards, income tax cuts and other taxation measures could free up capital to allow for greater levels of private pension provision.
The reduction of the top marginal income tax rate and continuing tax freedom of capital gains especially in equity investment (after a holding period of one year) create a generally positive environment for private pension savings, says Mayer.
Mayer says that politicians have failed to recognise how the pay-as-you-go system has become unsustainable, and have made the problem worse by misusing the pension system as an instrument for labour market policy and for income transfers to post-unification eastern Germany.
All we look for on pension reform is the governments acknowledgement that the system has become unviable. We expect this acknowledgement to be given in the form of a ceiling on contribution rates and a cut in pension benefits, Mayer said.