In February, the EU Commission published an analysis of economic and social challenges faced by the Member States in its annual Country Reports. The reports are part of the European Semester which is a cycle of economic coordination that monitors reforms and which contributes to the early detection of potential problems that the Member States need to deal with. In the Country Reports, the EU Commission has assessed the degree to which the Member States have implemented the country-specific recommendations published in May 2016. The Commission also regularly issues statements on social reform issues.
Review of the country-specific recommendations from 2016
The recommendations made by the Commission last year in the areas of pensions and employment that are relevant to German social insurance included creating additional incentives for delaying retirement. The justification for this is the ageing population and the resulting shortage of workers, especially skilled workers. This not only affects the workforce but also the long-term sustainability of the pension system. According to the Commission, a gradual lowering of statutory pension levels also increases the risk of poverty in old age.
Incentives for later retirement – limited progress
In terms of the Commission’s recommendation to provide more incentives to retire at a later age, Germany was assessed as only having made limited progress. This took into account the introduction of a flexi-pension which had already been implemented. The flexi-pension promotes a combination of early retirement and part-time employment as this not only reduces pensions but also pension deductions. It also encourages older workers to continue in employment because they can acquire additional pension entitlements. However, the Commission believes that further evaluations are necessary in order to better assess the compensation provided for by the Improvements to Pension Benefits Act of 2014 to incentivise early retirement
Net replacement rate too low compared to other OECD countries
However, the Commission is of the opinion that there has been a deterioration in “pension adequacy”. This is also reflected by the Federal Government’s expectation that the replacement rate in statutory pension insurance will continue to decline. In particular, low-income earners and people with disjointed employment show a significantly lower net replacement rate than the OECD average. The Commission once again criticises the failure to use the systems of the second and third pillars of old-age pensions, which is significantly contributed to by the inadequate provision of information on overall pension entitlements.
Other negative aspects of the old-age pension insurance system highlighted by the Commission include current low interest rates, which is particularly detrimental to the third pillar, and the significant gender gap in pensions which continues to persist. At 45.7%, this is well above the EU average of 38.3% (2015 figures). As a result, older women are at particular risk of poverty.
The Commission considers that it is possible to improve old-age pension insurance by implementing the reforms proposed in the “Overall Concept to Pension Insurance” because this aims to strengthen the second and third pillars of old-age pensions via various measures, for example, additional incentives for employers to offer company pensions.
Response from the Federal Government
The Federal Government has now responded to the Country Report published in February by releasing its National Reform Programme 2017. It outlines the measures that can be taken to implement the recommendations set out in the European Commission’s Country Report.
According to the National Reform Programme (NRP) there are effective incentives for later retirement. It points out that there is a positive employment trend among older workers (28% of people aged 60-64 were still working in 2005 compared with 56% in the third quarter of 2016). The introduction of the Flexi-Pension Act on 1 July 2017 should also continue this trend. The Federal Ministry for Economic Affairs and Energy (BMWi) believes that the regulations contained within the Act concerning the progressive crediting of supplementary income and the effect of continued employment on increasing pensions, as well as pension cover will contribute to implementing the country-specific recommendations with regard to incentives for later retirement.
The EU Commission will present new country-specific recommendations on the basis of the national reform and stability programmes submitted by the Member States. It will deal with the main challenges that need to be addressed.
The country-specific recommendations for Germany from May 2016 can be viewed here.
The Commission’s Country Report for 2017 can be viewed here.
The BMAS brochure for the Overall Concept on Old-Age Pension Insurance can be viewed here (German only).
The Federal Government’s National Reform Programme 2017, published by the BMWi, can be viewed here (German only).