A break with the old German state pension scheme

Published on November 7, 2003

Story by

jörg sommer und diana wehlau

Translation by:

lindsey evans

In many countries of the European Union, the question of pensions is currently high up on the political agenda. Sharply rising national debt has prompted debate about the aims and conception of state pension schemes, the balance of responsibility between public institutions and private organisations, and their structure and scope. In Germany, after controversial discussions, an extensive reform program came into force in January 2001. The 'keystone' of this pension reform is the partial replacement of the national pension scheme (GRV), for which costs are split between employers, employees and the state, by privately-funded pension plans. The GRV, up to now the main source of income in old age for the majority of the German population, is undergoing a fundamental transformation, and experiencing a not inconsiderable decline in standing as a result.

Existing principles swept aside by 2001 pension reform

The reform was deemed necessary - according to official justifications – due to the ageing population, and high national insurance and social contributions costs falling on employers and employees respectively. Consequently, keeping pension payments down has become the guiding principle in all areas of pension provision. The GRV scheme, that until now has concentrated more on meeting pensioner’s needs regardless of the costs, is gradually being transformed into a system in which support is limited to how much the government is in a position to dole out, given that the contributions of today’s young that are transferred more or less directly to the elderly will only go so far. At the same time, the percentage of a person’s salary representing pension contributions is being frozen at 20%. The consequences are twofold: firstly, state pensions will be noticeably less generous, and secondly the method of splitting pension contributions will be partially replaced – and not complemented- – by private pension schemes. The state will step down from its role as provider in favour of private companies, in order, so the Bundestag’s reasoning goes, to free the budget from the ‘burden’ of the GRV. However, investment in private pension plans entails new risks directly associated with the inherent instability of investment in international finance markets, and the fluctuations of inflation and exchange rates in response to global investment trends. Thus, it is not possible to predict today either the nominal or the real value a private pension will have tomorrow.

Dubious justifications for needless reforms

How can this pension reform have been passed and put into place when quite clearly assuring provision for people in their old age is not its top priority? The GRV scheme has, after all, been faced with similar challenges time and again throughout the last decades. In the future, just as then, reforms are possible within the established split-contributions system. Furthermore, a partial, much less a complete, shift towards personal pension schemes is neither necessary nor desirable. We have known for a long time, from writing on the subject, that the latter are by no means a superior alternative. Obviously, there are other concerns motivating this reform which only become clear at second glance. As mentioned earlier, the pensioners of the future will be worse off due to state pension cutbacks and additional risks. So who are the ‘winners’ in this reform? There are advantages for those in high income brackets for one and for employers as well, as they won’t be required to invest in their employees’ pension schemes. But in the main it is the financial service, insurance and personal savings plan providers who benefit – by having a widened sphere of activity, rich in potential for growth and profits. There is suspicion in many corners that these groups may have influenced the formulation of this reform which acts in their interests, but this has not been proven.

The setting of political priorities

One thing that is for sure is that the German pension reform does not serve to secure decent provision for tomorrow’s elderly. Instead, this question has been subordinated and exploited in order to meet other, primarily financial and economic, aims. In this sense, the reforms that have been implemented, as well as the new proposals already planned, reflect a process taking place across the whole of Europe: the EU is likewise fixated on the long-term viability of public finances and the promotion of international competitiveness. Thus, in Lisbon in 2001 the European Council explicitly set a new strategic objective for the coming decade – the EU evolving to become the most competitive and dynamic expertise-based economic area in the world. All areas of policy must be geared towards fulfilling this goal, including social policy. This new European direction shouldn’t come as a surprise. In fact, it is being argued that the very openness to interpretation of EU treaties paves the way for social integration - that is to say, the European Community was conceived from the start as a zone of common economic and social policies. This conception is, however, inspired by wishful thinking on the part of Euro-Idealists. In reality, the EU is principally an economic and monetary, not a social, union.

An alternative for Europe…

Not simply because we live in times of globalisation, but also as a matter of principle, the question begs itself: at which political level should social policy decisions be made? Is the shift from national to EU responsibility necessary or even desirable? The European Convention, at least, is striving for this transfer of competencies, and is trying to strengthen the social dimension of the EU with regard to values, civil rights, and objectives – a new approach never before seen in the history of European unification. But the Convention must be criticised for prioritising market concerns over social policies and the common good.

What does the alternative for Europe consist of? The fundamental aims and responsibilities of social security should lead the way in political decisions both at national and EU level. Respecting this order of priorities would change the direction of reforms within the EU, which is in the position to push for and support them. So far there has been a lack of political will – the demand for a European social union has remains unfulfilled.

… or an alternative Europe?

And will also remain unrealistic, as long as states and federations of states world wide measure everything in terms of economic growth, and determine all policies according to this one criterium. In this context providing for the elderly, and by extension the senior citizen himself, becomes simply a ‘financial burden’, which must be minimised, in order to free up the public finances and the motor of productivity that is the workforce. According to this logic the rise in life expectancy, otherwise a cause for celebration, becomes a financial problem. Therefore the suggestion for an alternative Europe makes the basic demand that politics be determined by people, that is by meeting people’s needs. Whether such a reorientation would be possible within the dominant economy-based system, or if it is indeed a contradiction, is a question on which not only the authors of this article are divided. Nevertheless it is valid, precisely because of the lack of alternatives, to formulate ideas that go beyond the virtually global obsession with profits and economic growth. A Europe orientated towards peoples’ needs – that is a real alternative.

Story by

jörg sommer und diana wehlau

Translated from Systembruch in der deutschen Alterssicherung