Adequacy report highlights the good and the bad of national pension systems.

Dr.WSW – 05/2018

Volume 1 of the European Commission’s Pension Adequacy Report presents numerous comparisons for consideration. These are then expanded upon in Volume 2, which contains the Country Profiles. These explain the main features of the respective pension systems, reform trends and adequacy, and finally outline the need for reform. 

Replacement rates

Germany lies in the bottom third, even for empirical and aggregate income replacement rates. Significantly more striking are the alleged (or real) differences when comparing current, individual theoretical replacement rates. At 56.2%, Germany lags behind at the very bottom and is only marginally better than some smaller Member States. Austria, which is seen as a ‘reference guide’ because of its similarity to the German pension system, is significantly higher at 86.1%. The same is true for neighbours France, with 76.3%, and even the Netherlands, with 102%, which is attributable to the strong role played there by the second pillar. 

 

One reason for this may be the greater redistributive nature of the German pension and tax systems in favour of lower retirement income, compared to the other countries mentioned (see Figure 32, p.53 in Volume 1). One also has to be very careful when comparing the costs of the respective systems. No matter how they are measured, these costs are consistently higher in other countries than in Germany. On paper at least, Germany is better at the long-term projection of replacement rates. It is one of the few countries where these will rise. However, this is not due to the legal pillar – which has projected a reduction by almost 5 percentage points – but to the supposedly dramatic success of supplementary pensions, which should then raise the level by more than 10 percentage points, an increase which supposedly only Denmark will surpass. 

 

This positive result must be viewed against the backdrop of some statistical peculiarities, which are not discussed in detail here. Readers have to work their way through to Germany’s country profile in Volume 2 to find out that the increase in the replacement rate is more of a statistical phenomenon. Of significance are assumptions about the future size of ‘Riester’ pensions and their payments. The federal government itself expects that the replacement rate will remain reasonably stable in the future, taking into account all three pillars. However, in the past, it has not been possible to offset the falling level of statutory pensions through increases in the second and third pillars. 

‘Riester’ pension

The report speaks positively of Germany’s personal pension scheme known as the ‘Riester’ pension. Its use of subsidies and tax breaks has encouraged low-income earners and workers with children to join the scheme. 

Gender pension gap and working life duration

Germany is one of the worst performers when it comes to gender gap in pensions. Compared to their European counterparts, Germans have a longer working life than average (38.1 years compared to the EU average of 35.6). This is also reflected in the ratio between pension duration and working life duration. The European average is 48%, compared to 51% in Germany.  

Need for reform

According to the report, there is a need for reform including expanding supplementary pensions and improving the protection of women and the self-employed. There should be better safeguarding of women, especially by boosting labour market participation; for example, by reducing contribution and tax advantages for mini-jobs.