1. Mannheim Research Institute for the Economics of Aging www.mea.uni-mannheim.de Pension Reform in Germany: Introducing a multi-pillar system to cope with demographic change Dr. Anette Reil-Held Seminar on Pension Reform Instituto de Empresa, Madrid, July 19th, 2010

2. 2 The motivation for a multipillar system 195020012050 Source: 11th Population Projection by the Federal Statistical Office Problem 1: Babyboom and Babybust „Problem 2:“ Increase of life- expectancy Solution 2: Increase retirement age ManyFew Solution 1: Partial Funding

3. 3 The Riester-Reform 2001: a Paradigm Shift towards a Multipillar System Three aims: 1.Sustainable contribution rates (below 20% until 2020, below 22% until 2030) 2.Secure long-term stability of pension levels: net replacement rate must stay above 67 % 3.Spread of supplementary private pension savings to compensate the lower pension level (individual and occupational pension plans) New Pension formula Retirement Saving Incentives Minimum Pension (means tested) Instruments

4. The Reform Package on the whole „Sustainability Commission“ in 2003  New set of assumptions about future demographic and economic development revealed that Riester Goals cannot be met.  Paradigm shift: think in financial possibilities.  Two main reform elements  Introduce sustainability factor in pension formula (Gross Pension Level will further decline from 48% in 2000 to 41% in 2040)  Increase retirement age from 65 to 67

5. 55 The Framework of the „Riester-Pension“  Goal: Build up supplementary, voluntary, funded old-age provision assuring an overall level of provision of 70 % (like pre- reform)  Subsidies in form of flat-rate benefits and tax relief (deferred taxation principle) Subsidies  In general, everyone is eligible who is affected by the reduction in public pension benefits (employees, wage compensation beneficiaries, and also spouses)  Pension plans need to be “certified”, criteria are e.g:  Regular saving payments  Provider must guarantee a strictly positive rate of return  Pension benefits must be disbursed as certain forms of lifelong annuities  Administrative and marketing costs must be spread over initially 10, now 5 years

6. 6 Saving incentives of Riester-pensions /300 Sponsoring by income and family status Gross income per year Single Married, single earner, no child Married, single earner, two children Single, one child State Spon- soring in % of savings Source: Gasche (2008)

7. Does it work? Development of Riester Pensions 1.4 13.6 5.6 10.8 Riester Pensions in Mio. Insurance plans Bank saving plans Investment fund plans Building loan contract 20011/2010

8. 8  Simplification of the regulation, e.g.  Introduction of a permanent subsidy appliance procedure  30% of accumulated capital can be paid as one-off payment  Stronger sales incentives: aquisition costs have to be spread over 5 instead of 10 years  Introduction of a new tax-favoured product „Basic pension“ or „Rürup Pension“ which aims at high earners and self-employed  Tax advantage for whole life-insurance was abolished  Introduction of gender neutral tariffs for Riester Pensions „Take-off“ after Amendment (mostly the „Old-Age Retirement Income Act“ in 2005)

9. 99 Does it work? Riester Pensions by number of children Source: Coppola and Reil-Held (2010) No child 1 child 2 children 3+ children

10. 10 Does it work? Riester Pensions by income Source: Coppola and Reil-Held (2010) 1. Quintile 2. Quintile 3. Quintile4. Quintile5. Quintile... of the disposable household income distribution

11. Alternative Approach: Income structure of flat-rate benefits recipients Yearly Income (in Euro) Share in % (2008) Up to 10,00031,5 10,000 – 20,00020,2 20,000 – 30,00018,8 30,000 – 40,00013,8 40,000 – 50,0007,1 More than 50,0008,6 Source: Rieckhoff and Stolz (2009)

12. 12 201020202030 Does it work? Will the Riester Pension close the gap? Source: Börsch-Supan and Gasche (2010) Year of entry into retirement Pension gap Riester pension % of a v g. I n c o m e

13. 13 Conclusion  Riester Pensions „took off“ after the complexity of the regulation was reduced.  Nowadays about one third of all eligible persons has got a Riester Pension Plan. Good or bad? What is a realistic target?  Riester Pensions are very popular among parents.  Lower income groups are harder to reach.  4% of gross income as retirement savings are (still) just enough to compensate for the reduction in the public pension level.  The higher retirement age contributes significantly to close the gap.

14. Mannheim Research Institute for the Economics of Aging www.mea.uni-mannheim.de BACKUP

15. Promotion of occupational pensions with Riester-Reform  Right to convert part of the salary into contributions to pension plans, either  Gross pay: tax deductible and exempt from social security contributions (up to 4% of upper earnings threshold)  Net pay: Riester incentives apply  New investment vehicle: Pension funds  Succesful: coverage increases from 35 to 46% of private sector employees