18th Baltic Conference «Mobility and safeguarding of social rights» Tuusula,, 9. 9. to 11. September 2009 1
Pension Reform and the Role of Public Pensions for Old-age Income Security in Germany Jürgen Meierkord Deutsche Rentenversicherung Bund mail: juergen.meierkord@drv-bund.de
Impact of the previous reforms Paradigm shift in old age provision Old: New: life standards garantuee by statutory pension insurance (spi): spi shall garantuee for insured persons with complete pension record a sufficent old age life standard spi is a major part of old age provision bound in various tiers In Germany spi should be combined with volintary investments in private products. See Riester pension ) 3
Implementation of raising the old age Adjustment of labour market policies: i.e Initiative 50 plus as a first step New understandig of what is old age Stautory pension scheme cares for new rehabilitation patterns for older workers. (How to enable them to work until 67 and more More flexible models on the ptahway from work to pension 4
Development of statory pension insurance for all economicly actives Old age protection of self employed in Germany - status: 31.12.1999 - total of self employed ca. 3,5 Mio. (12/ 1999) spi 6,3% farmers 7,2% today already ca. 4,4 Mio. self employed! free professionse 8,0% No mandatory provision 78,5% 5
Examples for types of insurance schemes in some EU member states Non active Self employed Universal system (Insurance for all) (all inhabitants) Denmark, Netherlands, Sweden, Switzerland, Finland workers Insurance for economicly active persons (self employed and workersn) Belgium, Greece, Spain, France, Italy, Ireland, Portugal, UK, Luxemburg, (Austria) Workers insurance (workers only with some exeptions for special vulnerable groups of self employed, like midwifes) Germany 6
Pension entitlements during occupation and during unemployment 35,00 One year employment/unemployment - average wage earners in 2007 30,00 26,27 25,00 20,00 23,09 21,02 18,47 Alte Bundesländer Neue Bundesländer 15,00 10,00 5,00 2,19 2,19 - Beschäftigung Bezug von Arbeitslosengeld Bezug von Arbeitslosengeld II 7
Old-age provision in Germany Old-age provision 2. Pillar Occupational pension system 1. Pillar Statutory pension insurance Pension provision for civil servants Pension provision for Farmers Professional pension Schemes for liberal professions 3. Pillar Personal Pension scheme Old-age basic income and basic income for invalidity 8
Financial Indicators 2007: Revenues and Expenditures Employees Employers contribution rate 19,9 % of gross income contribution ceiling (2006): West-Germany: 5.300 Euro East-Germany: 4.500 Euro Revenues 243,1 Billion EUR Contributions Transfer from Federal Budget 180,5 bln. bln. EUR 61,3 bln. bln. EUR Expenditures 235,5 Billion EUR Pensions Health insurance for for pensioners Rehabilitation Administration costs 212,4 bln. bln. EUR 13,8 bln. bln. EUR 4,5 4,5 bln. bln. EUR 3,7 3,7 bln. bln. EUR surplus 7,5 Billion EUR 9
Monthly Standard Pension 45 Pension Credit Points standard worker = 45 years of insurance and contribution at average wage -> standard pension Current Pension Value West: Euro 26.13 (since July 2004) East: Euro 22.97 (since July 2004) Standard pension West: Euro 1 176 East: Euro 1 033 Replacement rate: First pension / final salary of standard worker Gross replacement rate (2003): 48,4 % Net replacement rate (2003): 70,1 % 10
Reforms of the German Pension Insurance Pensionn -reform 1992 Provision for part time work/ early retirement Increased state subsidies Flexibility of working periods Taxation on old age benefits Legislation on sustainable pension provision 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 WFG AVmG/AVmEG Riester-Pension Legislation for pensions in context of German unification Mini jobs New provisions Reform of Invalidity provision since 2001: systematic increasing of the 2./3. pillar; paradigm shift 11
Pension Reform 2001 lower future contribution rates achieved by new pension adjustment formula reduced survivor's benefits (persons < 40 years) contribution payments by the state for periods of children s education additional money from ecological tax subsidies and tax allowances if insured persons engage in saving for old age in legally defined private pension schemes ( Riester-Rente ) certain types of occupational pension schemes 12
Coalition agreement of the new government Coalition agreement, amongst others: The standard retirement age will be raised to 67 from 2012 on Modification of the adjustments of pension Increase of the contribution rate on 19,9 % in 2007 13
New Pension Adjustment Formula 2004 average gross income last year contribution to supplementary old age provision contribution rate to the state pension scheme weight = 1/4 AR t AR t 1 BE BE t 1 t 2 100 100 AVA AVA 2010 2010 RVB RVB t 1 t 2 1 RQ RQ t 2 t 1 1 current pension value average gross income two years ago sustainability factor number of pensioners relative to active contribution payers 14
Impact of previous pension reforms in Germany Net pension level before taxes (in %) 70 65 60 55 50 45 40 35 52,7 50,0 46,7 43,8 30 25 20 2005 2010 2020 2030 Shrinking pension level until year 2030 by app. 15 bis 20 % 15
Effects of the Pension Reform 2004 Contribution rate 22 % in 2030 Reduction of gross replacement rate ( standard pensioner ): 2003: 48 % 2030: 39 % -> still above means tested social assistance Reduction caused by -> pension reform 2001: 6 percentage points -> pension reform 2004: about 3 percentage points 16
Effects on the net standard pension level 90,0 Effects of the reforms on the net standard pension level 85,0 80,0 76,9 70,0 70,0 64,5 60,0 50,0 Prognos 1987: Oberes Szenario Prognos 1987: Unteres Szenario RRG 1992 AVmG RV-Nachhaltigkeitsgesetz 58,4 40,0 1990 2000 2015 2030 2040 17
Effects on the contribution rate 45% Effects of the reforms on the contribution rate 40% 35% 41,7% 36,6% 30% 25% 20% 25,9% 19,5% 26,9% 24,2% 22,2% 15% 10% 5% 0% Prognos 87 - oberes Szenario Prognos 87 - unteres Szenario RRG 1992 ohne RV-Nachhaltigkeitsgesetz RV-Nachhaltigkeitsgesetz 1990 1995 2000 2005 2010 2015 2020 2025 2030 18
Old age quotient 60, 65 and 67 The relation of old-age people to the labour force is 100 to... 20-60; 65/67 (labour force) 255 > 60; 65/67 (old age people) 228 211 141 100 100 100 100 2001 old age people, aged 60 and more 2030 old age people, aged 60 and more 2030 old age people, aged 65 and more 2030 old age people, aged 67 and more 19
Importance of the statutory pension insurance Importance of the statutory pension insurance in the Three-Pillar-System: Pension expenditures 2000 expenditure total.: rd. 590 Mrd. DM occupational pension provision share of the statutory pension insurance: ca. 63 % professional pension schemes for liberal professions life insurance pension provision for famers supplementary pension provision in the civil service statutory pension insurance pension provision for civil servant 20
Importance of the statutory pension insurance Importance of the statutory pension insurance in the three-pillar-system: pension expenditures 2020 professional pension schemes for liberal professions occupational pension provision share of the statutory pension insurance: ca. 53 % Riester-Rente life insurance pension provision for farmers supplementary pension provision in the civil service pension provision for civil servant statutory pension insurance Own calculation 21
Increase of the standard retirement age > > > The standard retirement age will be stepwise increased on the age 67 Implementation 2012, ending 2029 Precise implementation is still unclear Impacts on the contribution rate In the long run: Reduction of the contribution rate by ca. 0,5 %-points (without taking consideration of the non pension reduced access for longtime insured) But the real reduction of the contribution rate will be significantly reduced (because of the non pension reduced access for longtime insured) Longtime insured (45 years of contribution) are not affected by the increase of the standard retirement age! 22
Conclusion and General Outlook The German Pay-as-you-go pension system has proved to be flexible enough to adjust to changing environments and external shocks The German Pay-as-you-go pension system is able to distribute adjustment costs in a democratically legitimated way Changing demographic situation leads to reductions in pension level, which has to be compensated for by private 2nd and 3rd pillar pension provision It is very important that the pensioners and employee believe in the Pension Insurance. One instrument to increase the credibility of the statutory pension insurance is the information about pension entitlements ( Renteninformation ) 23
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