Country Reports in European Semester
EU Commission proposes reform of German pension system.
Dr. Sch-W – 03/2019
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.
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
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.
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.
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.
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.
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.
Commission's 'Communication on Country Reports' can be read here.
country report is available here.