Demographic change, more specifically aging populations, represents a challenge for social security systems in many countries. Germany is particularly hard-hit, due to its low birth-rate and increased life expectancy, according to the latest key figures and forecasts from the Organisation for Economic Co-operation and Development (OECD), which publishes the information every two years in its “Pensions at a Glance” report.
The study reports that the number of Germans of working age is likely to shrink by 23 percent by 2062, in comparison to an average of only 11 percent within the OECD. This means that in the future, Germany will have significantly more pensioners as compared to the working population than will be the case in other developed countries.
High employment rates for older employees
One positive aspect in Germany, as shown by the study, is the above-average rate of employment for people aged 60 to 64. This age group enjoys an employment rate of 63 percent, as compared to the 54 percent OECD average. In France – in comparison – only just over one third of those aged 60 to 64 are still in work. A high rate of employment for older employees means that Germany’s pay as you go pension system is receiving more payments into the pension fund and paying out fewer benefits, as people are retiring later.
The effective retirement age in Germany, 63.8 years of age, is also significantly higher than the French average of 61.5 years of age. The legal retirement age in Germany, currently 65.8, is also higher than the OECD average of 64.4. Almost half of all developed countries are expected to raise their official retirement age in the future, resulting in an average age of retirement of 66 years within the OECD. In Germany, the retirement age is set to rise to 67 years of age, in Denmark the age of retirement will be set even higher, at 74.
Germany also does well compared to other countries when it comes to the number of older people currently experiencing poverty. The relative income poverty rate for those aged 66 and above in Germany sits at 11 percent, which is below the OECD average of 14 percent.
Worse prospects for younger generations
However, pension prospects for younger generations do not look as bright. Young employees in Germany currently entering professional life have significantly worse prospects than current retirees. They will be receiving significantly lower pensions compared to previous income than their peers in other developed countries. A 22-year-old starting her first job today and earning an average salary for the rest of her life while paying into social security, and retiring at 67 without any reduction to her pension will, on average, receive only around 55 percent of her final pre-retirement salary in net pension payments. The OECD average of 61 percent is much higher. These calculations already include voluntary, private retirement provisions. Without any voluntary provisions, her pension benefits will come to only 44 percent of her final pre-retirement salary.
Many self-employed individuals are also facing problems. Germany is one of five OECD countries that does not require blanket statutory social insurance for the self-employed. OECD experts have warned that self-employed individuals in Germany who do not pay into a statutory or private pension plan will therefore, when they retire, receive only 44 percent of the pension payments that an employed person with an identical income will receive.
The German government is currently planning to expand pension requirements for the self-employed. However, this potential reform only includes the newly self-employed, meaning it could be decades before all self-employed individuals in Germany have social security. The OECD believes that this is cause for concern. The proposed regulation will require that, in the future, self-employed individuals pay into statutory social insurance unless they have a private pension product that is found to be ‘equivalent’.
Calls for multiple reforms
The OECD report points to a need for reforms in other areas as well, including the controversial topic of retirement age. Linking the statutory retirement age to life expectancy after reaching the age of 67 could, in the future, help the German government to achieve their goal of ensuring a fixed ratio of net pension benefits to net pre-retirement earnings, according to OECD experts. So far, 25 percent of OECD countries have introduced such a link, which can improve the financial future of a pension system without reducing benefits. In Germany, this possibility is being discussed in academia, but is not currently the subject of a political discussion.