Missed opportunities when it comes to pensions

On the recommendations of the Pension Commission

The following text was written by Joachim Braun, one of the authors of the Attac policy paper ‘Pensions Instead of Returns’. It was originally published on the Beuerler Extradienst website . We would like to thank Joachim Braun and also Werner Rätz, who provided us with this text and further material on the subject.

Werner is a co-author of the booklet ‘A Universal Social System for a Care-Oriented Society’, which was written by several individuals organised within the Care Revolution network. The ATTAC working group ‘Enough for Everyone’ and ATTAC’s FLINTA plenary are partner organisations within the Care Revolution network.

We are currently witnessing what is arguably the biggest attack on the welfare state since Agenda 2010. Cuts to benefits, presented as ‘necessary’ austerity measures, are planned in the healthcare sector, for parental allowance, housing benefit, maintenance payments, asylum seekers, etc.

If the 33 widely praised recommendations of the Pension Security Commission are implemented, this will lead to further cuts to the state pension as well. The full pension after 45 years of contributions is to be abolished, and possibly the survivor’s pension in its current form too; a more significant demographic factor will lead to a further decline in pension levels. All of this could result in rising poverty amongst the elderly and place an additional strain on local authorities’ social welfare budgets, further eroding confidence in the welfare state and weakening democracy.

The recommendations for savings are justified by the threat of increases in contribution rates and the aim of raising pensions in the long term. However, the Commission describes the financial and reform needs relating to pensions in far less dramatic terms than is usually the case. Firstly, its report shows that, without reforms, the pension contribution rate would rise only moderately to 21.1 per cent by 2040 and would initially remain at that level – in 2024, the government had still been projecting a rate of over 22 per cent. The DRV’s financial situation is therefore not nearly as bad as is often claimed. This is also evident from the fact that the pension contribution rate has not had to be increased since 2007 and was even reduced to 18.6 per cent in 2018. It has remained stable ever since.

This stability has been possible because, on the one hand, significant cost-cutting measures have already been implemented in the pension system over recent decades, for example by raising the state pension age, reducing pension levels and eliminating certain qualifying periods. Furthermore, the demographic ‘gap’ resulting from more people moving from work into retirement than from school into the labour market has so far been more than offset by immigration; the number of employees subject to social insurance contributions has risen more sharply over the last 15 years than the number of old-age pension recipients, meaning that the ratio of pensioners to contributors has actually improved slightly in favour of the contributors.

The Commission recognises the importance of the ‘labour force potential’ in financing pensions and also cites ‘immigration’ as one of the means of closing the ‘baby-boomer gap’ – amounting to 400,000 workers annually – over the coming years. Further (perhaps better managed) immigration into the labour market, as has been the case to date – e.g. a net inflow of 200,000 people per annum – would in fact already close half of the DRV’s revenue shortfall. However, the Commission does not pursue this approach consistently. To strengthen the contribution base, it proposes only measures that would make better use of domestic labour potential, particularly that of women and older people.

One sensible provision in the Commission’s proposal is the recognition of the principle that all those in employment should be covered by statutory insurance; that would, at least, be a small step towards universal health insurance for all residents. But here, too, this promising approach is undermined by the exemptions for self-employed people with their own pension schemes; they are to remain exempt from the general insurance obligation. Thus, it is precisely those who are financially well-off who are to retain their privileges.

The transfer of civil servants to the DRV is being postponed to some unspecified date in the future. The fact that reserves are at least to be built up again for pensions and that the number of civil servants is to be capped does little to alter the fact that no bold and consistent solution – such as that found in Austria – has been found for the pension system, which is actually in a far more dire financial situation than the statutory pension insurance scheme.

The Commission rejects the idea of drawing on investment income, as is done in Switzerland, on the grounds that it is incompatible with the system. This represents a missed opportunity to broaden the funding base of the pension scheme and thus ensure its long-term viability.

In addition to the increases in contributions, an allegedly rising federal subsidy for pensions is often cited as a justification for the cuts. The facts, however, tell a different story: As with health insurance, the federal government does not cover the full cost of all the non-insurance-related benefits it has ‘mandated’, such as the mothers’ pension or the top-up for pensions in the former East Germany; as a result, the pension fund actually relieves the burden onthe federal budget rather than adding to it. This is a ‘hidden form of taxation on contributors’, as the Commission rightly concludes; yet it nevertheless initially seeks only to ensure transparency regarding non-insurance-related benefits. This involves public expenditure of up to 40 billion euros annually, which is borne exclusively by those covered by social insurance – that is, not by the self-employed, civil servants or freelancers. If these benefits were actually covered by all taxpayers (one can dream, after all), pension contributions could fall by 2 percentage points as a result alone – the reform target would almost have been achieved.

However, the truly striking and risky element of the reform package is the introduction of a capital pillar within the state pension scheme. This directly undermines the tried-and-tested pay-as-you-go pension scheme, as the proportion of wages channelled into the capital markets no longer counts towards the pay-as-you-go pension.

The hope is that pensions will be higher in the long term, as it is assumed that the new ‘pensioner-capitalists’ will benefit from profits on the global capital markets. Until then, from 2032 onwards, a state bridging allowance is intended to make up for the shortfall in returns; this will not come cheap for taxpayers! Employers, too, will not see any relief initially, which was, after all, one of the objectives. They must contribute half of the contributions for the capital investments. They will presumably try to use this as a bargaining chip in collective bargaining negotiations and pass on part of the costs.

Added to this is the high level of risk. Proponents of funded pensions are banking on high returns on the stock market, so that future share buyers will finance the pensions by purchasing the shares that have been saved up and have risen in value, in the hope that share prices will rise even further. However, it is extremely uncertain whether the stock market boom will continue indefinitely. The price rises of the past three decades are largely attributable to the benefits of globalisation – which are now being called into question by Trump’s tariff policies – and to corporate tax cuts, which have been exhausted. There is therefore a high risk that the funded pension system will not work out. This is currently evidenced by the financial problems facing the occupational pension schemes, which entered into risky financial bets during the previous period of low interest rates and are now failing. This follows on from previous attempts at funded schemes, which have failed (during the crises of 1923 and 1945 onwards). The funded Riester pension was not a success, nor has the ‘Fund for the Financing of Nuclear Waste Management – KENFO’, cited by the Commission as an example, has yielded an average return of just 2.9 per cent per annum since its launch in 2017 – far below the high expectations and even a slightly lower return than that of the pay-as-you-go pension scheme.

Attac calls for genuine pension reforms which, by taking all incomes into account, would enable a pension system for all that is financed on a pay-as-you-go basis in a spirit of solidarity and safeguards people’s standard of living. The proposed reform does not achieve this.

The author, Joachim Braun, is an active member of Attac Düsseldorf and co-author of Attac’s founding manifesto, ‘Pensions rather than Profits’.

We would like to thank ATTAC’sSocial Security Systems Working Group for the following additional information:

What is Attac proposing?

Attac advocates a pension system based on solidarity, comprising two key elements:

A poverty-proof basic component for everyone. Everyone living permanently in Germany will receive a basic component in old age that is sufficient to cover their basic needs. This prevents poverty in old age and replaces the current cumbersome bureaucratic system, which involves the coexistence of basic income support and complicated supplementary payments. The basic pension is financed on a solidarity basis through a general social security contribution levied on all income. Executive board remuneration and corporate profits are included in the same way as earned income. At the same time, contribution assessment ceilings are abolished, so that those with greater means contribute more to the common good. Switzerland shows that it works.

In addition, there is an income-related occupational pension component. Furthermore, as before, all employees accrue pension entitlements under the pay-as-you-go system, with income-related contributions being split equally between employees and employers. Every additional euro paid in increases the future pension. So work always pays off.

This model achieves the two key objectives: preventing poverty in old age and safeguarding living standards.