Death not an option for German pension debate

July 14, 2009

It may not be legislation, but a recently passed “pension guarantee” has re-kindled debate over a pillar of Germany’s welfare state – the notion of “inter-generational justice”.

The agreement, which basically calls for nationally funded retirement benefits to be locked in at current levels for all eternity, has not gone down as smoothly as its sponsors would have liked, since many nowadays see the country’s sagging birth rate as a sign coming generations will struggle to support their predecessors in old age. Two years ago when elections were far off, the government headed in a different direction, deciding to gradually expand the retirement age to 67 from 65 in order to offset both the birth rate and rising life expectancy.

While the agreement had already been supported by both parties in the awkward left/right governing coalition, some policymakers cried hypocrisy last week when it passed a final hurdle in parliament.

Outspoken Finance Minister Peer Steinbrueck kicked off the generational sparring when he called the agreement “absurd” and pointed out that the current generation of pensioners is doing better than any other in the past. Increases in retirement benefits outpaced salaries in July in one of their fastest jumps since reunification almost two decades ago, he noted. The statements could hardly have pleased his fellow SPD party member Frank-Walter Steinmeier, the Social Democrat candidate for Chancellor who had supported the idea.

Economy Minister Karl-Theodor zu Guttenberg, a rising star from the conservative CSU/CDU bloc also took his own pot shots at the agreement, calling it nothing but a “pure declaration”.

Underlying these comments and others that followed in a succession of headlines lies Germany’s demographic time-bomb. With one of the world’s oldest populations and a birth rate among Europe’s lowest, the theory goes, benefits will have to be cut as the number of contributors to the pension system falls and the number of recipients rises.

There is a possible alternative – but it would involve substantial tax hikes at a time when the opposite is in vogue. With companies are all too eager to move to countries with low taxes, cheaper labour, and fewer questions asked about social responsibility, a tax hike of this order looks like a no-starter for politicians trying to keep the economy competitive.

Thus arises the question of fairness between generations, or Generationengerechtigkeit. Why should this generation of workers pay for relatively lavish packages next to which their own retirement will probably pale in comparison? How fair can such a system be? Steinbrueck himself has said: “The ones being pinched are the 25- to 35-year-olds who want to have children.”

“People will always be making babies,” goes the famous quote from an architect of the current system, Chancellor Konrad Adenauer. But even back then in 1957 when the idea was fresh and German demographics were in a fruitful postwar upswing, some had voiced warnings. Now, with the economy floundering in its deepest recession since the war, the greatest test for “dynamic pensions”, as they were called back then, could lie in the years ahead.

Agreement aside, pension rules are already locked in for the coming years. And with the September election just around the corner, politicians may try to sweep this one under the carpet. But with some 20 million German retirees getting ready to vote, it’d be interesting to keep an eye on the polls to see which party is seen as a stronger defender of pensioners.

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