EU Commission proposes reform of German pension system.

On 27 February, as part of the current European Semester, the Commission published its country reports with an assessment of each country’s progress (or lack thereof), including progress in not always popular structural reforms. Across Europe, the pace of implementing the country-specific recommendations has remained largely steady. In particular, progress has been made in the implementation of recommendations to promote permanent jobs and to tackle labour market segmentation.

In contrast, there has been little progress made in broadening tax bases and in some cases there has even been backtracking in the area of long-term sustainability of public finances, including pensions. Although the Commission did not specifically assess this in its Communication (COM(2019) 150 final), it has identified Spain, Portugal and Germany as countries where measures to increase pension expenditure have been introduced or are in the pipeline. Measures to strengthen the sustainability of health systems have been sluggish and fragmented. As recommended, the tax burden on labour has been reduced in many countries, whereby Germany and Ireland are continuing to reduce the tax burden on low-income and middle-income workers.

The Commission scored Germany well on the indicators for the European Pillar of Social Rights, except for the gender employment gap. In contrast, wage growth has only been moderate and there continues to be a need for significant investment. Despite some progress, the tax burden on labour is still too high, including that on low-income earners.

Both the long-term sustainability and adequacy of pensions are challenges for Germany. The fairness and apparent regressive nature of the pension system must be taken into consideration. This refers to the fact that people on low incomes live shorter lives on average and thus receive a pension for a shorter period of time (excluding survivor and disability pensions). The Commission also recommends, in a somewhat convoluted way, that German automatically adjust pensionable age to reflect life expectancy.

Another option would be to reform the German pension system following the Swedish model. This would mean a simulation of a notional defined contribution system without there being ‘real’ capital-based coverage.

At least in theory, all economic, market and demographic risks would have a direct effect on the amount of pension entitlements and pensions. However, Sweden shows that this does not have to be the case in practice. In the midst of the ‘crisis’, pensions should have been cut. This is something that policy makers did not want to ask of the electorate and so short-term adjustments were made.

The Commission also sees a need to reform the German statutory pension system by ensuring that self-employed people are covered as well. It also criticised the private pension schemes in Germany (Riester-Rente). Due to the guarantees placed upon these schemes (ultimately, they are little more than preserving capital), they often produce low or negative yields. They also have high administrative costs. The Commission is indirectly in favour of pure investment funds as pension schemes.

The Commission's 'Communication on Country Reports' can be read here.

Germany’s country report is available here.