German Pension Policies: The Transformation of a Defined Benefit System into ... What?

Abstract

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. …

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