Since the unification of the two German states, the system of mandatory pension insurance in Germany, based since 1957 on a pay-as-you-go scheme, has been under constant financial pressure. By 1997, to balance current pension claims of retirees with current revenue from workers, the contribution to the Public Pension Scheme had increased to 20:3 per cent of the payroll, split equally between employees and employers. Since then, a further increase in contribution rates has been avoided only by substantial extra subsidies to the pension system. In fact, the recent increment in federal subsidies, mostly financed through new taxes on the consumption of energy and mineral oil, has been large enough to moderately reduce the payroll contribution to the Public Pension Scheme, to the current rate of 19:1 per cent. In 2000, the government subsidy to balance the pension insurance budget was expected to reach A49:4 billion. This was the largest expenditure item in the government budget, totalling 20.2 per cent of all spending. The federal pension subsidy, which is usually justified as compensating for redistributive elements that counteract the strong tax-benefit linkage characteristic of the German system of state pensions, like credits for child rearing or education and a raising of low contributions to a minimum level, now covers more than 27 per cent of the pension benefits. Translating the fiscal burden related to this pension subsidy into a hypothetical contribution rate, the actual burden on labour through public pensions would be as high as 25:2 per cent of the payroll. Thus, the Public Pension Scheme is already imposing a high financial burden on contributors and taxpayers. During the first half of the new century, as German society, goes through a demographic transition to higher old-age dependency, the financial pressure on government budgets will become even more severe. The long-established fact that the current public pension scheme might be unsustainable, with a diminished ratio of contributors to economically inactive transfer recipients, has produced numerous reform proposals aimed at improving the long-term viability of the German Public Pension system, ranging from a taxfinanced minimum pension to advanced funding schemes. Nevertheless German governments for a long time have introduced only tentative measures stabilizing the pay-as-you-go system. The 1992 Pension Reform Act will raise the mandatory retirement age for all workers to 65 between 2001 and 2005, and has reduced hitherto strong incentives for early retirement, but the discount in pensions for premature withdrawal from the labour force is still not actuarially fair. The former Kohl administration
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Apr 25, 2023
Jochen Pimpertz 
Open Access