German Parliament Freezes Pensions

For the first time in postwar Germany, pensions will not rise to correspond to inflation rates. In a vote split along party lines, Germany’s parliament on Thursday voted to freeze pension payments for the next year. Chancellor Gerhard Schröder’s coalition government of Social Democrats and Greens plugged the emergency plan as a last-ditch measure to preventing a rise in contributions to the statutory pension system, but the opposition Christian Democrat Union was not convinced it was the right solution and voted against it.

As it stands now, workers pay 19.5 percent of their wages to the pension fund. But because of the changing demographics in Germany and the rising number of jobless, fewer and fewer people are paying into the system. In order to counteract this trend, contributions have been increased in the past, but analysts and government officials say they have reached their limit at nearly 20 percent of overall income. Something else has to change instead.

Therefore starting in January, there will be a freeze on inflation-adjusted increases in pensions for 2003 and from now on elderly people will be required to carry the full cost of nursing insurance. Taken together, the two moves effectively turn the freeze into a reduction of pensions.

Without the measure, however, an average pension of €1,000 ($1,145) a month would have risen by about €10 ($11) next July.

Filling the hole, speeding up recovery

The government sees Thursday’s vote as a crucial step to keeping non-wage labor costs from rising any further and hopes that the reforms will help put Germany back on the road to economic recovery after three years of near-recession.

Experts had previously said that without the emergency reforms, Germany's pension system would lack at least €8 billion ($9.1 billion). The move will save the system about €2.2 billion ($2.5 billion). A reduction in pension fund reserves will save another €4.7 billion ($5.3 billion).

Opposition calls reforms a "fiasco"

But opposition leaders called the reforms a "fiasco," saying that parliament would have to deal with the issue again next year to avoid deficits in the pension system in 2005. Opposition leader Angela Merkel, who heads the Christian Democrat Union, called for a long-term reform of Germany's pension system instead of repeat emergency fixes.

The government does not need the support of the second parliamentary chamber, the opposition-ruled Bundesrat, in order to freeze pensions and change the nursing insurance coverage.

Christian Democrats, who dominate the Bundesrat, could only block a decision to move the payment of pensions to the end of the month, an additional plan put forth by the government to save the pension system another €600 million ($687.3 million) in the short-term.

Pensioners, Trade union leaders oppose measures

Trade union leaders also criticized the reforms, saying that raising worker contributions to the pension system might be necessary to ensure that pensions stay at or near the current level.

Pensioner advocates accused the government of breaching a promise to bring pensions in the former East Germany up to West German standards. The freeze would prevent this for years to come, the president of the national pensioners' association told a local newspaper.