Stepping Up the Game: Should Self-employed and Civil Servants Pitch In for the Pension Fund?
If contributors, including government officials and self-employed individuals, contribute to a pension fund, could it potentially be beneficial? - It's worth considering the potential benefits if both civil servants and self-employed individuals contribute to the pension fund.
By Nadine Oberhuber* ~ 1 min read
The Expert Council's calculations point to a promising future: Incorporating self-employed individuals into the mandatory pension insurance would bring slight positive benefits during the 2030s. However, as they retire, relief would gradually lessen. The silver lining persists even up to 2080. Similarly, expanding the insurance to future civil servants could alleviate financial pressures on the fund "in the short to medium term," primarily if only contributors are admitted initially without granting additional pensions. Offering this access may initially reduce contribution rates for all insured persons, although longer-term benefits could prompt this decrease to reverse around the mid-2070s.
However, opening up pension insurance isn't a magic bullet for fixing the fund. Notably, the state may incur additional pension expenditures for civil servants, as it does for public employees, amounting to around 3,240 euros per month, more than twice the regular pension. To put things in perspective, current public servant pension costs surpass 53 billion euros annually.
It's worth noting that today's retirees and active civil servants with ensuing pension claims will continue living for many more years. Indirectly, both self-employed individuals and civil servants finance the pension scheme through the yearly tax fund subsidies, which currently amount to about 116 billion euros.
This article was initially published in June 2024.
As we delve deeper into the implications of integrating self-employed and civil servants, several issues arise:
On the Financial Side of Things
- Increased Contributors: Broadening the base of insured persons can potentially improve financial inflows into the pension fund. However, factors like income consistency and contribution levels must be carefully considered to ensure smooth premium collection and forecasting. Self-employed individuals, for example, tend to have more unstable income patterns compared to employed workers, adding complexity to financial projections.
- Pitfalls of Self-Employed Pension Arrangements: Some countries, like Finland, are already grappling with the self-employed pension scheme--specifically the challenges of irregular income review, problematic income definitions, and insufficient pension coverage. Careful planning is necessary to mitigate these risks when incorporating similar groups into mandatory pension insurance.
- Accurate Income Assessment: The effectiveness of including self-employed individuals depends on adequately assessing their earned incomes for contribution purposes. Reviews and clarifications might become resource-intensive and critical in defending the fund's integrity.
Contribution Rates: Rise or Fall?
- Potential Contribution Increases: Expanding pension insurance to civil servants and self-employed individuals could increase total contributions, assuming proper income assessment and collection. However, considerations must be made to ensure fund sustainability if these groups have inconsistent incomes or lower contribution capacity.
- Added Costs and Administrative Overhead: Incorporating self-employed and civil servants could heighten administrative intricacy due to the need for more frequent income verifications, clarifications of employment status, and irregular contribution patterns.
- Pension Entitlement and Equity: Enfranchising new groups raises questions about pension benefits' fairness and entitlement. Issues such as civil servants' distinct pension expectations and self-employed individuals' irregular contributions could impact future pensions, demanding reformation efforts to maintain system equity while preserving financial sustainability.
- The financial pressures on the pension fund could potentially be alleviated in the short to medium term by expanding the insurance to self-employed individuals and civil servants, especially if only contributors are admitted initially without granting additional pensions, and offering vocational training to these groups may improve their ability to make consistent contributions.
- In the long term, the effects of increased contributions from self-employed individuals and civil servants, combined with the need for accurate income assessment, adequate vocational training for self-employed individuals, and careful planning to mitigate challenges like irregular income patterns, will play a significant role in determining the sustainability of the pension fund and the overall success of the community policy. Here, personal-finance management and business acumen, particularly in the area of vocational training, will be crucial for ensuring the financial health of the pension fund.
