German Chancellor Gerhardt Schroder's vaunted pension reforms passed through the Bundesrat (Germany's upper house) last week, but the chorus of applause that greeted this result is a testament only to the ossified state of Germany's public institutions rather than to the reforms themselves, which are puny and may not even succeed on their own terms.
The bill that passed reduced the state pension from 70% of average lifetime annual earnings to 67%, but, wait for it, by 2030! It also created voluntary private pension schemes with tax deductible contributions, which will allow Germans to invest initially 1% and by 2008, 4% of their income into supplementary pension provision.
The tax breaks will cost 10.2 billion euros when fully implemented, and if fully taken up; but some commentators immediately pointed to the raft of conditions and limitations in the legislation. New private pension funds will have to meet an elaborate set of requirements and need the approval of a public body created specifically for the purpose; and providers of private pensions will have to guarantee that the real capital value of each individual's pension fund will not fall below the sum of the contributions they have made to it.
Germany's federation of private banks warned that the high level of bureaucratic regulation would limit investors' returns and called for the introduction of Anglo-American style pension funds.
Chancellor Gerhard Schroder said: "Until now the old-age pension has depended on a single pillar. The age profile of the population makes a second pillar necessary: the capital-guaranteed old-age pension." And he means it: currently, there are 2.6 Germans of working age for every German 60 years or older. By 2030 this ratio will have fallen to 1.4.
As any actuary knows, this will create a catastrophic situation for Germany's public finances, and for the Chancellor or any other public figure to pretend that the new legislation is anything more than a token gesture in the right direction is thoroughly misleading. No doubt Mr Schroder knows this, and plans to expand the scheme once it has taken root. Let's hope so, for the sake of future generations of German workers, who will be bent double by the weight of their social security contributions, already running at 20% of gross pay.
Moody's Investors Service said it confirmed its positive outlook on the German life insurance market following announcement of the approval by the Bundesrat. Moody's said it expects that the reforms will lead to a substantial increase in the volume of retirement savings business sold by German life insurers.
"Insurers' expertise and experience in costing mortality-related guarantees and portfolio risk management are likely to put the life insurance industry at a significant initial advantage, compared with alternative long-term savings providers." said Simon Harris, Moody's VP/Senior Analyst.
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