Parliament Approves Pension Reform Plan

Germany's younger generation will have to start taking more responsibility for their retirement, since after today's vote the country's state-backed pensions will not be as generous in the future.

The German parliament, or Bundestag, passed the reform plan as expected with a necessary majority of Social Democrat (SPD) and Green party members, 302 in total. The opposition cast 291 votes against the plan and one SPD member abstained. The reform plan does not need to go to the Upper House, the Bundesrat, for approval.

The plan, introduced last year as part of Chancellor Gerhard Schröder's Agenda 2010 spate of labor market and welfare reforms, changes the formula that determines how pension benefit levels are set and tries to limit the growing rising contribution rates employees pay into the system.

According to Ulla Schmidt (photo), the minister for health and social security, a state pension alone in the future will no longer be enough to maintain living standards employees had before they retired.

Overview

A central element of the reform takes into consideration Germany's graying population and seeks to slow down annual rises in pension benefits.

Low birth rates and increased longevity have led to critical pressures on the system, a pay-as-you-go plan based on tax-paying workers supporting retirees through compulsory contributions.

As the ratio of working-age Germans to pensioners narrows, expected to fall from two taxpayers per retiree to one over the next decades, the system is becoming increasingly unsustainable.

In the future, pension benefit rates will rise more slowly than overall income levels. Pensioners will have to forego an increase in benefits this year. Next year, as the formula comes into effect, modest increases of .38 percent in western Germany and .61 percent in the eastern part of the country are expected.

Obligatory contributions to the state system, which are paid jointly by employees and employers, are now set at 19.5 percent of wages. According to the government, these contributions will stay under 20 percent until 2020 and will remain under 22 percent until 2030.

Currently, pension benefits stand at about 53 percent of the average wage of the retiree during his or her working life, less social security contributions. According to estimated government revenues, pension benefits will fall to 46 percent of the average wage by 2020 and down to around 43 percent by 2030.

But in order to quell a possible rebellion by some left-leaning SPD members, the government has introduced a clause that requires future governments to keep pension payments from falling below the 43 percent mark in the future.

The reform plan makes this possible by increasing federal contributions to the system from tax revenues or raising the retirement age from 65 to 67. The parliament will decide on the retirement age increase in 2008 at the earliest.

Fuzzy math

Opposition politicians accused the government coalition of using numbers that do not add up. According to Horst Seehofer, the social affairs point man for the conservative Christian Social Union (CSU), setting a benefits floor at 46 percent while limiting the contributions ceiling to 22 percent by 2030 is not possible. Maintaining the 46 percent rate would require an increase of contribution levels to 24 percent, or a retirement age of 70.

"Otherwise, these aims make no sense," he told reporters, accusing the government's reform of being only a prelude to further cuts.

Politicians from the Free Democrats (FDP) also had sharp words for the benefits floor. Heinrich Kolb, social affairs expert for the FDP, criticized the 46 percent number as being unrealistic.

"Those who don't want to go under the 46 percent mark can't be committed to maintaining the system's sustainability," he told the Associated Press.