GERMAN REFORM CUTS PENSION COSTSPosted On: Oct. 19, 1997 12:00 AM CST
BONN, Germany-German employers hope a new law aimed at reforming the national pension system will stabilize their ballooning contributions.
Earlier this month, the Bundestag, or lower house of Parliament, approved cuts in pensions to reduce the financial burden on employers created by an aging population. The legislation, which does not need approval by the upper house of Parliament, or Bundestrat, becomes effective in 1999.
The law effectively will cut average benefits to 64% of final salary by the year 2030 from the current level of 70% of final salary.
The law also will lower disability benefits, beginning in 2000. Previously, those who could not work in their occupations got pensions, but now, only those with general disability will get pensions.
However, those payments, too, will be cut back. Full pensions will go to those with general disability who can work fewer than three hours a day, but someone able to work three to six hours will get a 10% cut in pension payments. Those with general disability able to work six hours a day or more will get no pension until they are 65.
Demographic changes are burdening Germany's pay-as-you-go pension system as lower birth rates and longer life expectancies leave a smaller base of workers to pay for a growing number of retirees. Record unemployment in Germany is aggravating the problem.
Employers hope for long-term stabilization of joint employer/employee contributions, despite shifts in the age pyramid.
"Without reform, average employer/employee contributions would reach 25.5% of wages by 2030," said Volker Hansen, a social insurance expert with the German Employers Assn., which represents employers. "We hope now contributions stay under 22.3%."
Current annual contributions-at a rate of 20.3% of wages, split evenly by the employer and employee-amount to 304.5 billion deutsche marks ($174.2 billion).
Under the reforms, financially troubled companies no longer need to adjust pension funding every three years to fully track the rate of German inflation, which averages 3% annually. The law reduces the adjustments to a 1% increase for newly hired employees after 1999.
Despite such improvements, employers fault the legislation for failing to address immediate problems.
"The reform was urgently needed in 1998 and cannot wait until 1999," said Dieter Hundt, president of the German Employers Federation, which represents Germany's businesses.
High unemployment already has reduced the number of people paying into Germany's pension system and resulted in a 1% rise in employer/employee pension contributions last year and this year. The Ministry of Labor determines the contribution rate, which is adjusted depending on economic development and reserves.
"As labor costs rise, it leads to more corporate rationalization," warns Mr. Hundt, meaning higher labor costs mean increased production costs and reduced competitiveness-thereby prompting layoffs.
"Higher pensions or health care contributions are an additional mortgage on the job market," said Assn. of German Chambers of Industry & Commerce President Hans Peter Stihl.
Higher pension contributions threaten to destroy the beneficial effect on employers of upcoming tax reductions and moderate wage settlements with worker unions.
"We are in a vicious circle," Labor Minister Norbert Bluem told the Bundestag. "Higher contributions mean more unemployed, and more unemployed mean fewer people to pay contributions, which means higher contributions."
Efforts to break the cycle have focused attention on alternative pension arrangements.
Norbert Walter, chief economist at Deutsche Bank, thinks the current system will have to make way for a funded system, in which working people pay into their own accounts.
"It's the only equitable solution," he said.
Meinhard Miegel, director of the Bonn, Germany-based Institute for Economy and Society, contends that "by the year 2025, pensioners will receive less from the system than they paid in over their working careers."
Mr. Hansen thinks the government is hindering pension reform alternatives, such as employer-sponsored pension plans, by rejecting certain business-backed initiatives. One of the initiatives employers pushed for unsuccessfully is a reduction in the tax on pension reserves.
"German tax authorities are restrictive when it comes to building reserves. Pension reserves are taxed at 6% interest, regardless of whether a reserve earns that kind of interest or not. We believe the tax should be lowered," Mr. Hansen said.
With such a tax incentive, Mr. Hansen believes companies would take up some of the slack left by the government pension system. "If the current system must be replaced, then it's time alternatives were given the attention they need," he said.