1. Preparing Our Pension Systems for the Future: The Case of Germany
Jörn Wesenberg, LL.M.
Deutsche Rentenversicherung Bund, Berlin

2. O u t l i n e Structure of the German Statutory Pension System (GSP)
Demographic challenges for GSP
The main reforms undertaken so far
1992/2001/2004/2007
IV. Effects and results of the German reform path
Financial sustainability
Adequacy of pensions
V. Conclusion and outlook

3. German Statutory Pension System: Characteristics
compulsory system
linked to gainful employment
insurance principle: equal value of contributions and pension benefits – income related wage compensation
no minimum/basic pension level within the GSP
financed through mutual contributions of employers and employees (50/50)  currently 19,9%
financed on a pay-as-you-go basis (75%/25%)
rehabilitation prior to paying pensions
mutually self-administered (insured/employers)

4. Wage and Salary Earners
I. Statutory Pension: Who is insured?
Wage and Salary Earners
Self-Employed
Unemployed
Public Sector
Private Sector
Artists
Crafts-man
Farmers
Liberal Professions
Others
Sector
Profes-sion
Civil servants
Workers/
Employees
Workers/Employees
Other Miners
Sectors
1. Pillar: Mandatory Schemes
Civil Servant
Pension
Provi-sion
Statutory Pension Insurance (GSP)
General State Pension Pension
for miners
Farmers
old-age
assistance
Contributions paid into GSP by other State bodies/ Institutions
Institutes for liberal profession
General State Pension
2. Pillar:
Additional
schemes
Additional Occupational
pension plan for Old-age pension schemes
public sector
3. Pillar:
Private schemes
Privately financed pension-plans (savings, insurances, properties)
- promoted by the State
Supplemantary Aid:
basic security benefits in old age (tax-financed & means-tested)

5. II. Demographic trends in Germany – birth-rate
per 1000 women
Source: Federal Statistical Office, 2006.

6. II. Demographic trends in Germany – Key figures of pensioners insured in GSP

7. II. Demographic trends in Germany – Key figures of pensioners insured in GSP
Old-age dependency ratio (ages 65+ as a % of age years) 65 60 55 50 45
Percent 40 35 30 25 20 15
1950
1960
1970
1980
1990
2000
2005
2010
2030
2050
Old-age dependendcy ratio
15,7
18,0
23,4
26,6
23,9
26,8
31,7
34,0
50,0
60,0
Source: Federal Statistical Office, 2006

8. III. Major pension reforms (a)
change to net adjustment of pensions
adjustment of pension formula (target: 70% net income)
raise of the retirement ages 60/63 to 65 from 2001
reductions for early retirement (0,3% per month)
possibility to draw partial pensions
linkage of federal subsidies to contribution rate and pension level

9. III. Effects of the pension reforms 1992-2007

10. III. Major pension reforms (b)
new paradigm: stable contribution rate (2020: <20%, 2030: < 22%)
long-term pension level fall to 67% (2030) of net income
new (modified) gross adjustment of pensions
strengthening of capital funded 2. and 3. pillars
2nd pillar: new right to wage conversion in occupational schemes
2nd / 3rd pillar: “Riester pension” (promotion through tax benefits and state bonuses, contributions guaranteed)
“Basic security benefits” (tax financed + means tested)
annual information of all insured above age 26 of GSP pension sum

11. III. Major pension reforms (c)
introduction of „sustainability factor“ into pension formula
pension rise linked to ratio of standard-pensioners vs. standard-insured (employees)
sustainability factor can not lead to direct pension cuts
gross pension adjustment again modified
net replacement rate before tax shall be kept above 43% in 2030 (if below 46% government needs to report to parliament)
modifications: specific retirement ages/educational periods
gradual reform of pension taxation (pensions vs. contributions) will lead to significant cuts in future level of net pensions

12. III. Projected development of replacement rates for statutory pensions after reform 200470 70 65 65 60 60 55 55
Percent 50 50 45
Percent 45 40 40 35 35 30 30 25 25 20 20
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
year pension payment starts
Total gross replacement rate
Net replacement rate for 1. year pensioners, reform projections 2004
Net replacement rate without 2004 reform on taxation of pensions
Minimum net replacement rate level by law (before 2004 reform)
Net replacement rate before taxation

13. III. Major pension reforms (d)
Reform 2007: Pension age
from 2012 to 2029 gradual pension age rise (6567)
new type of pension from 2012:
full pension at 65 without reductions for insured having paid contribution for 45 years
possibility to make up for pension cuts so far not realized:
pension level protection clause modified
from 2011 a rise in wages and in pensions  will be partly offset against cuts not realised since 2005
government to report regularly on labour market
initiative „50plus“

14. III. Employment rate of older workers (55-64 years) in Europe (%)10 20 30 40 50 60 70
Poland
Slovakia
Slowenia
Malta
Italy
Luxembourg
Belgium
Austria
Hungary
France
Greece
EU25
Spain
EU15
Czech Republic
Germany
Lithuania
Latvia
Portugal
Cyprus
Ireland
Finland
Estonia
United Kingdom
Denmark
Sweden
2000
2005
Source: Eurostat

15. III. Major pension reforms (e)
Reform 2007 – assessment
pension-age rise 6567 useful measure
missing corner-stone in latest reforms
financially: lower contribution rate (-0,5 in 2030)
effects for sustainability factor  higher rise of pensions
problem: new pension for extra long contribution years
however: unjust effects (women; twisted careers; only contribution years count, not sum of acquired pension credits)
financially: negative effects for contribution rate (+0,2%/2030)
problem: less transparency for pension adjustment

16. IV. Pension reforms: The central elements
paradigm of stable contribution rates
incentives for 2. and 3. pillar schemes
modifications for pension adjustment formula
modified gross adjustment
sustainability factor
reform of pension taxation
prolonging working lives
closing early retirement paths with short transitions
raising statutory pension age to 67
raising the employment rates of age 55+
information campaigns

17. Anstieg der öffentlichen Alterssicherungsausgaben in Prozent des BIP
IV. Pension reforms: Financial effects
4,2
3,7
5,5
4,1
7,9
4,7
4,0
4,4
2,1
2,2
6,2
2,6
-1,1
3,2
-1,2
5,1
1,7
3,3
7,1
3,1 2
6,4
0,4
7,4
3,5
9,7
0,6
2,0
2,3
-2,0
6,0
10,0 AT BE DE DK ES FI FR IE IT LU NL PT SE UK
EU15
EU25
Increase
Increase
Anstieg der öffentlichen Alterssicherungsausgaben in Prozent des BIP
Increase in public pensions expenditure,
% of GDP
Quelle: EU Kommission 2001; 2006

18. IV. Pension reforms: Adequacy of pensions
Current risk-of-poverty rate by age groups (Poverty line: 60% of median equivalised income)
Theoretical replacement rates projected
Source: EU-Kommission 2006

19. IV. Pension reforms: Trends in 2. and 3. pillar
more and more 2. and 3. pillar pension schemes:
46 % of private sector employees (date: )
including the public sector a total of 60%
clear rise of contracts for Riester-pensions
2006: 2,4 million new contracts (total: 8 million)

20. possible issues for the future:
V. C o n c l u s i o n
current situation:
system financially sustainable
adequate future pension replacement rates together with 2. and 3. pillar schemes
possible issues for the future:
rise in discontinuous & flexible work forms outside social security
sinking entitlements for low wage earners / long-term unemployed
development of additional pension schemes (2. and 3. pillar)
rise of old-age poverty rates?

21. Further information Internet:
Contact:
Joern Wesenberg, LL.M.
Deutsche Rentenversicherung Bund
- Section
Hallesche Str. 1
10963 Berlin, Germany

22. I. Statutory Pension – some key figures
Insured (in 2006)
approx million insured persons
approx million “actively insured”
nearly 80% of all in Germany gainfully in work
Pensions (in 2006)
approx million old-age pensions paid-out
1.65 million invalidity pensions
5.9 million pensions for widows and orphans
Finances (in 2005)
231 billion € income
235 billion € expenditures

23. General preconditions
qualifying periods
general waiting period = 5 years of contributions
Regular pension age (65 years)
Invalidity pensions
Survivors pensions
specific waiting periods = 15, 20, 25, 35 years
specific legal and personal pre-conditions

24. At-risk-of-poverty rate by age groups in EU (Poverty line: 60% of median equivalised income)