Business World

Sunday 24 September 2017

German pensions crisis is warning to rest of the world

Social Protection Minister Leo Varadkar has a lot of work to do in relation to pension schemes
Social Protection Minister Leo Varadkar has a lot of work to do in relation to pension schemes
Brendan Keenan

Brendan Keenan

A glimpse of something which would otherwise be very difficult to capture arrived courtesy of the German business group Ifo. It shows what happens when the retirement age is cut - in this case to 63 years.

This was an odd affair to begin with and, wouldn't you know, the result of an election promise. The retirement age had already been increased from 65 years to 67 after the global financial crash; so this was "restoration plus," with a cut of four years.

Germans' compulsory pension contributions had reached an eye-watering 19pc of monthly income by 2014. They are due to rise further, but are capped at 22pc by 2030. It may be a cap, but it is a very big one.

There is a generous promise at the other end: that pensions should not drop below 46pc of the average net wage before 2020, or below 43pc by 2030. That is a very decent pension but, as workers know - or should know - promises, even from governments, are not guarantees.

It is also a grim illustration of just how much one has to save to fund a half-pay pension. The 20pc of earnings which all Germans will have to contribute may actually not be enough to cover the cost of the more generous scheme.

When separate plans for better pensions for homemakers are included, the government's own figures put it at €9bn extra per year by 2030. Other bodies say it could be even more. Not surprisingly, employer groups are among those bodies but they also include the official council of economic experts dubbed 'the Wise Men'.

Trade unions in Germany and here say, reasonably enough, that an increase in the retirement age is really a pay cut. Equally, a reduction on the other side is equivalent to a pay rise.

The question is who will pay? It is a sleight of hand to say "government" or "employers." If there is a savings shortfall, it will be the customers and taxpayers of the future - the children and grandchildren of the pensioners - who carry the can.

This "inter-generational" enforced bargain is a particular concern in Germany, where the population is ageing faster than almost anywhere else.

There is surely a warning here for the rest of the world, especially the euro zone. The Germans are looking to their surpluses and the resulting savings to meet this demographic implosion and no-one, not even Donald Trump, will easily change their minds.

For some, those minds seem a bit too arithmetical. The economic effects of such changes, and not just the accountancy, have to be taken into account, even though they are not easy to quantify. That is where the Ifo survey is instructive.

Over half of the firms polled said they had staff who had left at the new earlier retirement age. Of these, two-thirds reported losing highly qualified workers but a much smaller proportion saw unskilled employees or managers retire.

Firms did not find it easy to replace departed staff, with three-quarters of service companies reporting difficulty. Smaller companies (which in Germany means less than 250 employees) had particular problems.

Germany's older population means that some 90pc of the Ifo sample have workers who are within five years of the new retirement age. Where they seek to persuade workers to stay on past 63, most rely on flexible hours rather than re-training.

Even bearing in mind that this is an employer-sponsored survey, it seems clear that there will be a loss of productivity from the lower retirement age, as well as the actuarial cost. Raising the retirement age, as in Ireland, makes for big actuarial savings but it is at least possible that it will reduce productivity as well: not because workers are gone, but because they wish they were.

It will be a while before we have any data to help us find out. The State pension is now payable at 66, rising to 67 in 2021 and by a year more in 2028: assuming, of course, that the politicians hold their nerve better than their German counterparts.

That is a big assumption these days. Social Protection Minister Leo Varadkar has a roadmap for pension reform (nobody does anything these days without a roadmap) but for how long will he be in charge of the that particular vehicle?

That's the trouble with something as long-term as pensions. For half of my life as an employee, the relevant ministers talked about their plans for pension reform and here I am, collecting my own, still unreformed, State pension.

Perhaps the most important thing in Mr Varadkar's speech to the Pensions Authority earlier this month was that an actuarial review of the social insurance fund is to be prepared by the middle of the year. This is the PRSI fund from which State benefits such as the old-age pension are paid. Elections of various kinds notwithstanding, the review at least should get done.

After that, it gets difficult. Pension changes cost staff and employers money now, for benefits which will come much later. But the grand Ponzi scheme which unions and employers would prefer, where new workers pay for the pensions of the old, is no longer viable.

They depend on the inflow of new contributors matching the departure of those collecting their reward, which is rarely the case in the private sector. In the public sector, they depended on people not living for an average 20 years after they retired.

Then there is that 20pc contribution which Germans, and others, pay. Many Irish companies have baulked at that kind of saving, preferring more modest contributions from themselves and their staff, but which will deliver very little on retirement.

The roadmap is supposed to lead to a universal retirement scheme, where every worker would automatically be enrolled, or at least unless they decided to opt out and take their chances.

Employers would have to facilitate the scheme, and make contributions to it. The very low social insurance rates paid by Irish firms, when compared with other countries, would come under scrutiny. The majority of private sector workers are not in any pension scheme, so they would have to contribute something too. Plus, of course, working for longer.

Quite a wish list, as Mr Varadkar acknowledged. He noted that the Australians had managed to get agreement among the social partners for this kind of transformation - so it can be done. Some years ago, they did something similar just as radical to a health system which was very like our own in its mix of private and public. Maybe the sunshine helps.

Brendan Keenan is a member of the Pensions Council. Any views expressed are his own.

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