Pension adjustments unavoidable

Demographic change in Germany is presenting the pay-as-you-go pension system with considerable financing problems owing to lower birth rates and increasing life expectancy. Reforms in the past few years have aimed to ensure the financial sustainability of the pension insurance scheme by scaling back annual pension adjustments, raising the contribution rate and lifting the statutory retirement age from 65 to 67. The Bundesbank also believes it would make sense to again raise the retirement age for the period after 2030. "Longer working lives should not be taboo, but instead considered as a key factor," the authors write in the latest Monthly Report.

Under these measures, the contribution rate should not rise above 22 % before 2030 and the pension level - that is, an annual average standard pension in relation to annual average earnings, less social security contributions and before tax in each case - should not fall below 43 %.

In addition, a government-subsidised private pension scheme - called the Riester pension plan - was introduced. Its objective was to create a voluntary retirement saving option to compensate for the declining pension level provided under the statutory pension insurance scheme with a privately funded pension. All of these measures are based on Federal Government calculations extending to 2030.

Longer-term projections called for

To date, official projections do not extend beyond 2030. After that date, however, the statutory pension insurance scheme will come under even greater pressure than before on account of demographic change, as noted in the Monthly Report. This is not solely the result of increasing life expectancy: the retirement of the last baby-boom generation until roughly the mid-2030s, which will significantly reduce the ratio of wage and salary earners to pensioners, also plays a role.

"The official projections, which extend no further than the year 2030, should not hide the fact that adjustments to the pension insurance scheme are inevitable if its sustainability is to be assured going forward." Drawing up longer-term figures could highlight the need for adjustments and show ways in which that need can be addressed. What is more, that can reduce the uncertainty that insured persons might have about their financial security in old age. This is a topic that would benefit from the Federal Government shedding more light on future developments.

Longer working life a key factor

Essentially, there are three variables that can be used to stabilise the pension insurance scheme: a higher contribution rate, a higher retirement age and a lower pension level. The Bundesbank's economists note that sharply increasing the burden of contributions can drag on economic activity. Projections based on legislation as it currently stands show the contribution rate rising to around 24 % by the year 2060 from its current level of 18.7 %. Compounding that, demographic developments also look set to push up the burden of contributions elsewhere - the health insurance scheme, the long-term care insurance scheme and in the budgets of central, state and local government, to name but three.

One of the main factors in the demographics-driven need for adjustment is rising life expectancy. While insured persons who retired in 1960 at the age of 65 had a remaining average life expectancy of 13.5 years, this figure had already climbed to an average of 19 years for men and women in 2011. "The relative pension-drawing period - that is, the ratio of pension-drawing periods to contribution periods - rose strongly during this period from 30 % to 42 %." This ratio would keep climbing due to the rising life expectancy. The increase in the retirement age to the age of 67 will stabilise this ratio at a high level by the year 2030. Lifting the retirement age further to 69 for new retirees up to and including 2060 could stabilise the relative pension-drawing period and brake the decline in the pension level provided under the statutory pension insurance scheme.

Commenting on the pension level, the Bundesbank writes that the Federal Government's official figures understate developments in that they do not allow for the increase in the retirement age from 65 to 67 - and thus for the longer working life. This, the Bank writes, holds true for both the statutory pension insurance scheme and the total pension level (that is, including private retirement provisions).