Rising life expectancy and a low birth-rate are disturbing the balance of the German state pension system, which is financed on a pay-as-you-go basis. Since 1993, the number of pensioners in the system has increased by 5 m to over 20 m and is set to grow even faster when the baby-boomers born in the fifties and sixties reach retirement age.
The current ratio is 100 workers paying contributions for every 60 pensioners. By 2030 the ratio is expected to be 1:1. This means that either pension increases must be severely restricted or contribution rates must be raised. Since employers pay half of their employees’ statutory pension contributions, this would raise non-wage labour costs and thus limit the employment prospects of younger generations. If policymakers want to prevent this, there is no alternative but to lower pension levels.
Indeed, this course has already been set. The so-called sustainability factor in the formula by which pensions are calculated limits the rise in pensions when the ratio of contributors to recipients worsens. The Riester factor, named after a former minister of labour, reduces the growth in pensions in return for state subsidies to private pension schemes. The latest reform, raising the retirement age to 67, is the result of the realisation that the extra years gained by the rise in life expectancy cannot be spent exclusively in retirement. Instead, working life must be extended. To avoid increasing the burden on future generations, retirement incomes will increasingly have to be provided by company and private pension schemes.