German pension policies: the transformation of a defined benefit system into ... what?

VerfasserRub, Friedbert W.

1 Changes in the Retirement Age

Changes in the retirement age add up to very important changes concerning, on the one hand, the raising of the mandatory retirement age and, on the other hand, important reductions in pensions because of early retirement. Both are intended to stop and also to change the incentives for having a low labor force participation for older workers.

The German pension system allows for early retirement within a period of 36 months before the mandatory retirement age. During some important reforms in the late 1980s, the government started to increase the regular retirement age for women, the unemployed, those insured for long periods and severely handicapped persons to 65 years. During some important reforms in the late 1980s, the government started to increase the regular retirement age for women, unemployed, long insured and severely handicapped persons to 65 years. Early retirement was and still is possible, but for the first time it was coupled with a reduction of the pension level of 0.3 percent per month. Using the maximum period of 36 months, it amounts to a diminished pension of 10.3 percent. If workers decide to work longer, the pension will increase by 0.5 percent per month. However, at present only a very small number of pensioners make use of that option. The incentive structures of these regulations are clear: the advantage of working beyond the mandatory retirement age will be greater than the disadvantage of taking early retirement. The law was enacted in 1989 and came into force on 1 January 1992.

In 2007, the grand coalition between the CDU and the SPD under Chancellor Merkel decided to raise the retirement age again from 65 to 67. To be clear, starting in the year 2012 and with the birth year of 1947, the retirement age will be increased by one month per year and per birth year. Only by the year 2029 will the retirement age reach the target of 67 for all those born in the year 1964. That means that people born in 1958 must work until the age of 66. All in all, these gradual increases in the retirement age make it possible for future pensioners to adjust to the changes and to become clear about the consequences for the course of the individual's working life. Working longer will be still fostered and early retirement discouraged by the reductions mentioned above.

A heated debate set in mainly within the Social Democratic Party, but also within the unions and among the general public, while the unions and parts of the Social Democratic Party, primarily the leftist wing, started to protest the measures taken by the government. This, perhaps, will force the party leadership to change their position in the years to come.

The intentions in increasing the retirement age are clear. Firstly, in the face of greater life expectancy, the duration of pension payments is reduced and, as a consequence, the expenditures for pensions will be diminished. Secondly, the number of contributors to the pension system will be higher because future pensioners will have incentives to work longer in order to avoid pension reductions. And thirdly, if pensioners are forced to retire due to bad labor market conditions for older workers or simply decide to do so, their pensions will be lowered by a maximum of 10.3 percent, which in turn cuts down on the costs of the expenditure side of the pension system.

All in all, these measures mark a decisive change in the retirement policies in Germany. During the 80s, early retirement was a very important method for large firms to lay off older workers using the early retirement regulations of the pension and the unemployment systems. In addition, the unions and big enterprises negotiated contracts for early retirement. The situation was exacerbated with the introduction of the so-called PreRetirement Act of 1984 (Vorruhestandsgesetz) which contained several new measures designed to promote early retirement, but made it contingent on the existence of industrial agreements between the unions and the employers' organizations. Early retirement was made possible via collective labor agreements or through occupational retirement plans. As a consequence, a complete institutional regime for early retirement developed and functioned on the basis of an interplay between the pensions and the unemployment systems (c.f. Trampusch 2005).

The act allowed early retirement at the age of 58 and set the minimum benefit at 65 percent of the last gross income. In addition, improvements could be made possible by agreements between unions and companies or by collective bargaining. It was mainly the chemical industry, but also the metal, mining and other industries, which made use of the Vorruhestandsregelung to lay off older workers. Parallel to this, the duration of unemployment benefits was extended for older workers and for workers with a long duration of compulsory contributions. They were now entitled to thirty--two months of unemployment benefits (Trampusch 2005: 210). The various laws now made it possible to retire at the age of 57 because workers could receive unemployment benefits in the form of Arbeitslosengeld for three years and then receive pensions due to unemployment at the age of 60. Because companies often subsidized the loss of income during the period of unemployment benefits, and because pension entitlements due to unemployment were paid out without any reductions, the Vorruhestandsregelung and other regulations developed into a regime of early retirement which was frequently made use of, mainly in the energy and mining sectors, but also in the iron, steel and automobile industries, and which was backed up by the social partners and the main political parties. During German reunification, early exit from the labor market became the most important instrument in dealing with the economic crisis in the Eastern part of Germany. Between 1993 and 2002, about 675,944 East Germans retired early due to unemployment, and in 1992, 30 percent of all withdrawals from the labor market in Eastern Germany took place through pre--retirement, age-bridging, and pensions due to unemployment (Trampusch 2005: 211). However, things began to change as it became increasingly clear that those strategies were lumping the social security systems, especially the pension and unemployment systems, with huge financial burdens. During that time, the contribution rate constantly increased and non-wage labor costs put heavy burdens on German industry. In addition, growing unemployment drove the contribution rate up further, while demographic changes made it clear that the pension system would be burdened with additional costs in the near future. In 1998, the average retirement age in West Germany was 59.7 years for male workers and 60,6 years for female workers. In the Eastern part, or the New Federal States, it was 57.7 and 58.3 respectively (BOrschSupan and Wilke 2005: 583).

2 From Two to One: The Reforms of Invalidity Pensions

From the very beginning, invalidity pensions had been an integral part of the German pension system. To be more precise, under Bismarck, social security in cases of invalidity was the most important part of the pension system. Most people did not reach the regular retirement age and thus gained pensions only in cases of disability. Most workers simply died before reaching the general retirement age.

Since the introduction of the Old Age Security System under Bismarck in 1889, invalidity pensions have been an institutionalized part of the German pension system (for details c.f. Tennstedt 1972). Under the first law of 1889, workers were able to claim invalidity pensions if they were unable to earn more than one third of that which workers with a similar occupational education were able to earn. Only blue-collar workers were eligible for invalidity pensions. In 1911, old age and invalidity insurance was also introduced for white-collar workers, but with important differences. Invalidity was divided into two levels of disability. It introduced for the first time in German history the so-called occupational disability pension (Berufsunfahigkeitsrente) to which persons were entitled if they were only able to earn half of the income which a worker with similar occupational skills would earn. It also--like the old age system for blue-collar workers--provided for invalidity pensions to which persons were entitled if they were not able to earn more than one third of the earnings of a comparable worker. A two-class pensions system thus existed during the Weimar Republic and the Nazi Regime which gave privilege to white-collar workers (Privatbeamte bzw. Angestellte) over blue-collar workers. Only in 1957, together with the great pension reform, was blue-collar invalidity split up into the two levels to match that of white-collar workers.

The German statutory pension scheme (GRV) thus consisted of two levels of invalidity:

The first was the loss of at least 50 percent of the working capability in case of illness or working handicaps (Berufsunfahigkeitsrente). Insured persons were defined as suffering from occupational disability if their earning capacity was reduced to less than half of that possessed by a physically, mentally, and intellectually healthy worker of similar training and comparable knowledge and ability. The range of activities on which the insured person's earning capacity was to be judged included all those activities which were relevant to their occupational training, their previous occupation and particular demands of the previous occupation activity. The worker, however, was expected to earn an additional amount of income within the labor market, which meant working at a part-time job that could be reasonably expected of them considering their occupational training (Berufsschutz). Deciding on the appropriateness of jobs for occupational disability was a severe problem and the social courts started to develop and define a highly complicated scheme...

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