Pensions – looking into the future

A look into the future does not bode well, at least as far as the benefit side is concerned. The adequacy report unequivocally warns of a coming decline in the pension levels. Those who retire in 2059 will draw a lower pension in relation to their earned income than a new retired had in 2019 – even with the same career. Although the report assumes longer working lives in the future, these will still lag behind the increase in the statutory retirement age. Methodologically, this statement is based on a comparison of theoretical replacement rates1.

Today (2019), the net replacement rate (taking taxes into account) in the case of Germany is 57.8 per cent, which is in the lower range, compared to the front-runner Netherlands with over 100 per cent. In the future – by 2059 – the level is expected to fall drastically in many Member States, whereas it should rise slightly in Germany. If we extend the horizon to 2070 and use a ratio of average pensions to average wages as a yardstick, we will see a decline in almost all Member States that will average about 9.5 percentage points.

The report pays considerable attention to the gap between the statutory and the actual retirement age, where the EU average is expected to double from today’s one to two years. This has to be distinguished from the gap between the actual retirement age and actually leaving the labour market. If both effects are taken together, then the difference will increase by almost another year.

If we now look at the age at which people actually end their working lives, then the following picture emerges: The EU average is now 63.8 years for men and 63 years for women. The projections for the year 2070 assume that the average will increase to 65.4 and 64.8 years respectively.

The ageing report pays particular attention to the issue of minimum and basic pensions, including specific benefits that should protect against poverty in old age. However, with a few exceptions, expenditure on these items is well below one percentage point of GDP. This can be explained by the fact that in many countries minimum pensions coincide with general social assistance benefits, which were not included in the projections.

On the cost side, the focus was mainly on the development of the share of public pension expenditure in relation to the GDP. This was based on quite a broad understanding of “public pension expenditure”. In accordance with the rules of national accounting, all systems for which a government assumes ultimate financial responsibility come under this category. Therefore, minimum and basic pensions for those who have not acquired sufficient earnings-related entitlements are included, but benefits from the general social welfare scheme are not. Special schemes such as those for civil servants were also included, as were early retirement pensions, survivors’ pensions and invalidity pensions.

As shown above, under the projection, the share of pension expenditure, after a temporary increase, will fall back to today’s level by 2070. Specifically: expenditures as a share of GDP are projected to increase slightly on average from 11.6 to 11.7 per cent. The increase will be significantly higher, at two percentage points, here in Germany. However, this is gross expenditure. If one takes into account that taxes and social security contributions that are often levied on pensions, then one can obtain the net expenditure. It is 1.5 percentage points lower on average in Europe. Germany is one of the countries where the tax share will increase the most.