How secure are our pensions?
Family economist Prof. Dr. Christian Bredemeier on trends and facts about the pension system.
"The pension is secure," Norbert Blüm, former Federal Minister of Labor and Social Affairs, first said during the 1986 election campaign. This sentence has remained in the collective memory of the population to this day, and it led to the first pension reform, as the discrepancy between increased life expectancy and a lower birth rate was already recognized at the time. Today, more than 35 years later, scientists, entrepreneurs and politicians continue to speak out, saying that pensions in the near and distant future are no longer secure. At Bergische Universität, economist Prof. Dr. Christian Bredemeier is inevitably concerned with the development of pensions in connection with the topic of family economics.
Pension at 70, or...?
People are getting older and older, so pensions have to be paid for longer. Some time ago, Gesamtmetall boss Stefan Wolf called for the retirement age to be raised gradually to 70. "Demography presents us with challenges," says Bredemeier, "because now the baby boomers of the late 1950s are retiring one by one. And that's a very healthy generation, very fit, compared to our grandparents' generation. It is to be expected that many people of this generation will be granted a long life. And that's why adjustments need to be made to pensions." What is clear is that two things must balance each other out, the scientist explains. "It must always be the current working population that pays for the population living at retirement age. There is no other way! In this respect, we have only two adjusting screws; namely, the ratio of working people to pensioners and the ratio of contributions to pensions." One option is certainly the possibility of shifting the ratio of contributors to recipients, and in the short term this can only be done by raising the retirement age. Bredemeier explains it this way: "Even if we could massively increase the birth rate now, this would have an effect in 20 years at the earliest, i.e. with a delay of one generation. This would also mean that by then pensioners would no longer be able to participate in possible productivity increases in the way they have been able to up to now. Therefore, raising the retirement age is perhaps the lesser evil." By way of qualification, he makes it clear at the same time that this principle is not practicable for all occupational groups and that implementation would require further expert opinions and adjustments.
Raising the weekly hours from 40 to 42?
In addition to raising the age limit for retirement benefits, a discussion has also flared up about longer weekly working hours for employees. However, he said, this runs counter to a trend that has been gaining ground for a few years now. "We're all living in a time in 2023 where we're talking about working less. We've noticed that clearly in Corona times, too," Bredemeier says. As a result, he says, it's more important to ask how much relevance a standard employment contract will still have in the future, because more and more, he observes, more flexible weekly working hours are being agreed upon in individual agreements. "In the pension formula, this then also plays a role, because, if I only work 75%, I naturally only earn accordingly." Since all pension entitlements are always based on the income earned and not on the number of hours worked, the effects of reduced hourly work would be felt especially later by low-income earners, he said.
Relief through extra work, mini-jobs, immigrants and foreign skilled workers?
So what can be done to ease the burden on the pension system? What incentives encourage workers to work more? The part-time rate remains high among parents who want to raise their children themselves. Can an improved childcare situation provide incentives for more work? "Childcare places are a very important factor in work decisions for parents, statistically primarily for mothers," Bredemeier knows. However, he says, many of those who have chosen the family life plan have also targeted part-time work.
Mini-jobs arose from the desire not to burden low-income earners with additional social contributions. "That's how people wanted to create jobs, by enabling small employment relationships. What the employer pays goes directly to the employee. That was a conscious political decision." The fact that after a few years it became apparent that these mini-jobs were often performed by people living in households where someone was earning quite well was the other side of the coin, he said. In the area of immigration, things are also more complicated than they appear at first glance. Sure, the birth rate is higher among immigrant families, Bredemeier explains, but after a generation, they behave similarly to people who have already lived in the country longer because they have adapted to the conditions. Another problem for the German economy is the shortage of skilled workers, which people have tried to alleviate with employees from abroad. However, the bureaucratic hurdles are high, and qualifications acquired abroad are often not recognized here. "We'll have to rethink a lot of things here, too," says Bredemeier, "because if bureaucracy really is the stumbling block, for example because forms are too complicated and extensive and procedures take too long, the results are often what no one wanted." Of course, he said, there are professional qualifications that need to be proven beyond doubt. In healthcare alone, every patient wants to be treated by competent people. But there are also areas where formal credentials are not so important, he said. "There are specialized companies that, after a trial period, can tell if the person working is qualified for the job and can do what's required."
Mandatory insurance for all?
Another idea to stabilize the pension system, for example, is the possibility of compulsory insurance for civil servants or even the self-employed. "This is a point I have often talked about, and I wonder why this point is not more firmly anchored in the political discussion," Bredemeier wonders. "Unlike health insurance, the redistributive element in pension insurance is relatively small. Essentially, it's structured to be insurance against the risk of living a long time. Imagine getting older than most other people in your generation and living only on your savings. If they were then exhausted, you would have a problem. And that's actually what our pension plan is designed against, so you share that risk with people who had similar incomes while they were working." If one wants to stabilize the statutory pensions by adding new, high-earning groups, more redistribution would also have to enter the system, so that the high contributions of these groups would not only finance their pensions.
However, the transfer to a statutory pension insurance system is also associated with high hurdles, because the entitlements of civil servants are protected by the Basic Law. In addition, when a civil servant position is filled again, the personnel costs for employees would initially rise due to pension, health, nursing care and unemployment insurance. In other words, a civil servant in active service is still more cost-effective for the employers.
With 30-hour week to the pension?
Many young employees no longer want to work full time and are satisfied with a 30-hour week. Companies are also adapting to their employees with new work models. But is this development at all sustainable for the pension system? Bredemeier: "Two thoughts on this: If the 40/20 model, i.e. dad works 40 hours, mom works 20 hours, were to change to 30/30, then people would not work less. In addition, it depends on the income and not the hours. For the first time in the working life of my generation, we are in a phase where the labor market is an employee market. We have to see how many people are able to push through the desire for less work and how much salary they will have to give up in return. That will definitely be exciting."
Pension systems in Europe are difficult to compare
In Germany, about ten percent of gross domestic product is put into the pension system. Austria, on the other hand, is at 14 percent. This raises the question of why the German government doesn't put more funds into it. The countries are difficult to compare, Bredemeier points out. "The further you get into southern Europe, the more you find the tradition that the social system as a whole, i.e. the sum of state benefits in areas such as health, pensions, unemployment benefits, runs more strongly through pension insurance. There are also other family models, for example, more three-generation households. In these cases, the state benefits often go to the oldest generation. In this respect, it's very difficult to compare these statistics in particular, because the social systems are very different."
Increase in pension contributions in 2025?
In 2025, an increase in the contribution rate from 18.6% now to 25% is to be discussed. That means less net income for employees "First of all, it means less net from the gross," says the expert, "everything depends there on the economic development. At the moment, it looks like wages and salaries may be doing well," while price trends don't look so good. "If there is stagnation, it will be difficult to increase the contribution rate, because who wants to give up 6.5% of their gross salary? What would be helpful is economic growth, which is also reflected in salaries."
Pension poverty or deliberate precaution?
According to the German Federal Ministry for Family Affairs, Senior Citizens, Women and Youth, a total of 22.4 percent of Germans over the age of 80 are affected by income poverty. In the population as a whole, the rate is 14.8 percent. Bredemeier confirms that one should be concerned if this rate continues to rise. "If we don't increase the retirement age, the contributions or the tax subsidy, then it will be the state's job in the next generation to cushion this. Then we have to talk about catch-all mechanisms, such as a minimum pension and basic old-age security." Although there are ways for employees to counteract the threat of pension poverty - the Riester pension is an example of state-supported personal savings measures - the greatest risk factor is still too low an income during employment. Working people should, if possible, build up reserves, but: "You should always be careful with reserves, because there are also financial products that promise a lot but don't fit your own life situation." Home ownership can also reduce costs in old age, he said, but requires a high level of investment at the beginning and also entails some risks. "We live in life cycles and life plans are often different," Bredemeier concludes. "Most people first really go into debt between 30 and 40 -starting a family, owning property, getting a bigger car- and you don't want to say to trainees or students who don't have much anyway, now save first. That's advice that misses the point of life. But you have to realize that there comes a time later in life when our expenses are higher than our income. And we have to close this gap. Society also has a role to play here.
Prof. Dr. Christian Bredemeier has been Chair of Applied Economics at the Faculty of Economics at the University of Wuppertal, the Schumpeter School of Business and Economics, since 2019.