Privatization of public pensions in Germany: who gains and how much?

In: Tübinger Diskussionsbeiträge 148

Abstract

The state of the current German pension system is highly alarming. The aging society coupled with the prospect of increasing longevity is causing dramatic fiscal strains to the pay-as-you-go (PAYG) financed statutory pension scheme. In order to keep the current benefit level for future retirees, the contribution rate is projected to increase up to 30 percent during the next decades. However, already the current contribution level of 20 percent is considered to be too high. Therefore, the government enacted the 1992 Pension Reform Act and just recently presented a draft for a new Pension Reform Bill in order to restrain the expenditure growth. Both reforms intend to lower the pension level gradually and to finance a higher proportion of expenditures in the future by federal taxes. These measures, however, only improve the financial situation of the public pension system in the short and medium-run. The long-run fiscal burdens inherent in the system either require a substantial increase in the contribution rate or a dramatic reduction in the future benefit level. Since the necessary adjustments are almost unfeasible politically, the current unfunded pension scheme is seen at the 'verge of collapse' and unsustainable for the future. It is therefore not surprising that in Germany, like in many other countries, a growing number of economists are discussing the move to a fully funded pension system. In essence this means that public pensions will be substituted by private retirement provisions in the future. This paper, therefore, refers to the shift to a fully funded system as "privatization" of public pensions.