The Unrelenting Burden of Germany's Pension System
Struggling with age dilemma: Should you work harder or invest funds?
Year after year, a staggering sum of over 100 billion euros is shoved into the German Pension Insurance (DRV) in Berlin. But why such a hefty investment? Well, it's all about those insurance-external services – services the government foots the bill for, even though no contributions were paid towards them.
From the very inception of the pension insurance in 1889, to the comprehensive reform in 1957 in the Federal Republic of Germany, a hefty state subsidy was already in play. In fact, the share of state contributions in the pension insurance's total revenue was even more substantial than it is today, according to the trade union-affiliated Institute for Economic and Social Research (WSI) in Düsseldorf.
While politicians, journalists, and financial market lobbyists frequently criticize that without federal subsidies, the pension would be unsustainable and would likewise distress the federal budget, their concerns seem shortsighted. A glance at Germany's demographic development provides a different perspective. Shifting demographic trends stem from the long-term increase in life expectancy, which has resulted in the proportion of older people in the population growing, and an escalating number of pensioners to boot. Expectations predict that this trend won't dissipate anytime soon – the Federal Statistical Office predicts that the number of people aged 65 and over will swell by up to six million to at least 22.7 million in the next twenty years.
On the flip side, the number of employed individuals is in decline, albeit after reaching a record high last year. It's worth noting that Germany, being in the midst of a labor miracle, according to the KfW bank, has more people working now than ever since reunification.
Left-wing and trade union economists, however, caution against easy, market-driven answers. Despite the decrease in average working hours due to increased part-time work, the total number of working hours continues to rise. Even after a dip due to the Covid crisis, the total working hours of all employees reached a new record value in 2024. And even if self-employed people are included, the total working hours are not far below their peak value of 2019.
The demand for "more work" is on the rise, with the black-red federal government aiming for a high employment rate in the pension chapter of its coalition agreement. Yet, the population of working age is set to shrink particularly rapidly in the coming years due to the exodus of the so-called baby boomer generation from the workforce. This contraction will significantly diminish the economy's growth potential, despite any potential productivity gains.
Left-leaning academics see hope in increased productivity, advocating for a fundamental reform of the debt brake to enable sustained increases in public investment and boost the potential growth of the economy – creating a larger distribution space for the pension insurance system and the entire social system. By 2035, the UN and World Bank project that the working population (15 to 64 years) will decrease by 9.1% in Germany, similar rates could be observed in Italy (-11.8%) and Japan (-8.9%). Meanwhile, the working population in France is expected to remain stable, and in the UK, Canada, and the US, it is anticipated to grow. Facing a worsening shortage of skilled workers, Germany could further experience a slew of negative consequences, such as diminished investment appeal.
To counter this, options abound: Encourage higher employment rates, increase working life, facilitate more "qualified" immigration, and foster longer working hours. However, left-wing and labor-affiliated economists caution against focusing on neoliberal, market-driven responses. Instead, they propose securing living standards in old age and maintaining social balance in society, as outlined in their new "Memorandum 2025." In addition to economic growth, a fundamental tax reform and a fairer distribution of wealth are deemed necessary.
- The discussion about the sustainability of Germany's pension system often intertwines with finance, business, politics, and general-news, as it involves substantial investments, tax reforms, and the economy's growth potential.
- In the debate over addressing Germany's aging population and the increasing burden on the pension system, left-leaning academics advocate for a reform not only focusing on market-driven responses such as longer working hours but also encompassing economic growth, a fundamental tax reform, and a fairer distribution of wealth, which are crucial for securing living standards in old age and maintaining social balance in society.
