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The German Pension System

The German Pension System. By Christoph Wenzinger, Tom Surgeon, Rebecca Hale, Pierre-Emmanuel Leng and Lizzie Simpson. Pension System: History. 1889: Invalidity and old-age insurance (Gesetzliche Rentenversicherung, GRV) 1.7% of wage, paid equally by employer and employee

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The German Pension System

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  1. The German Pension System By Christoph Wenzinger, Tom Surgeon, Rebecca Hale, Pierre-Emmanuel Leng and Lizzie Simpson

  2. Pension System: History • 1889: Invalidity and old-age insurance (Gesetzliche Rentenversicherung, GRV) • 1.7% of wage, paid equally by employer and employee • 1957: First big pension reform • Transition from „Kapitaldeckungsverfahren“ to „Umlageverfahren“ • „Kapitaldeckungsverfahren“: Contributions are accumulated  individual assets. Insurance payments are financed by contributions and interest on capital. • “Umlageverfahren”: Contributions are not saved, but spent immediately on financing actual pensions. (Generationenvertrag / contract between generations) • Key feature of the reform: adjustment of pensions to the general development of income (dynamische Rente / dynamic pension)

  3. Pension System: History II • 1992: lowering of pension payments • 2001: Introduction of the “Riester-Rente” (Walter Riester, SPD)(Amendment of the „Altersvermögensgesetz“ on 11 May 2001) • In addition to the “Gesetzliche Rentenversicherung (GRV)” that works according to the “Umlageverfahren” • Works according to the “Kapitaldeckungsverfahren” • Private retirement pension system, financial support from the state, voluntary

  4. What is a Pension? • ‘A regular payment that is intended to allow the saver to subsist without working at a later point in his or her life.’

  5. Comparison between German and English pension system • In England there are four common pension schemes • 1)Personal pension • 2)Stakeholder pension • 3)Company occupational pension • 4)Basic state pension (BSP)

  6. Germany • In Germany there is a Pay As You Go public pension system • Size of pension fund is derived from* • *sum of accumulated earning points • *the adjustment factor • *type of pension and its value

  7. Statistics to show differences in pensions for men and women • Under Schroeder’s government • Average man’s pension = €1015 • Average woman’s pension = €508 • (in Western Germany)

  8. Merkel’s Pension Reform • Induced by fewer workers having to support more retired people. • People are living longer and birth rates are in decline • 40% people between 55-65 years of age are still working-very low percentage!

  9. Action Taken • Aim to raise pension age from 65 to 67 • Encourage employers to offer defined contribution schemes. • Ultimately hope to decrease the cost of the pension bill in an ‘economically struggling Germany.’

  10. Schröders Government;How pensions affected the people Schröder's government is credited with implementing Agenda 2010; this agenda included the following; cuts in the social welfare system (national health insurance, unemployment payments, pensions), lowering taxes reforming regulations on employment and payment Consequences After 2002; SPD lost support due to the ‘third way’ combining the ordoliberal "social market" with neo-liberalism. It was considered by many people to be dismantling of the German welfare state!! High unemployment rate still remained a problem for Germany

  11. Under Merkels Government… • Appointment of Merkel; ‘the public was eager for the government to get to work after six months of political turmoil.’ • more pro-American outlook- similar pension system as Germany AIMS • One measure taken; raising the top income tax rate • increasing a value-added tax from 16 to 19 per cent. • VAT increase is being put off till 2007 • One problem; High labour costs • Economic investments e.g. increased parental leave benefits and research spending • Rise in retirement age to 67 and decrease in pensions • Perusal of ‘trusting relations’ with United states

  12. And for the part-time workers?

  13. In the EU • Part time employment = 18.5% of total employment in Europe • Netherlands, the United Kingdom, Sweden and Germany = highest levels of part-time working • More than 2/3 chose a part-time work

  14. A good opportunity for old people • 1984: Trading banking and Insurance Trade Union (Gewerkschaft Handel, Banken und Versicherungen, HBV) • Part-timers must not be excluded from pension • 2000: 4th Euro Introduction Act (Euro–Einführungsgesetz) • block model with part-time working in old age

  15. A good opportunity for old people (contd.) • 2003 Third and Fourth Acts for Modern Services on the Labour Market: • People can work older with part-time jobs as on 1 July 2004 • 2004 Old-age Pensions Insurance Sustainability Act: • Increase of the age limit to 63 between 2006 and 2008

  16. But not only for old people • A lot of mothers are employed part-time due to care of children • Does not lead to unreasonable losses of pension entitlements • Conditions: • Child is 10 years old maximum • Where nursing care is provided • Special cases if more than 2 children • If employee earns less than 155€

  17. The Economy and Pensions • German Population getting older- but only work until 65- government stops receiving taxes and contributions • 2050: Worker: Pensioner ratio 2:1, today 5:4 • Schroeder: Agenda 2010: reform pension system • Need to discourage early retirement: • 50+ initiative

  18. The Economy cont… • 2003- State pension deficit of €2.8billion • Increase contributions rather than reduce benefits • 2030- German market for private and occupational pensions- 5 times that of today- €5trillion • Unemployment • 2003- 8.3% • 2005- 11.6% • Annual Growth -0.1% • Predicated to be below 1% next year • 2003- €10billion shortfall in pension insurance system

  19. Merkel Has Arrived… In order to deal with economic and pension crisis… • Raise interest rates • Increase VAT to 19% over next 2 years • Reduce level of unemployment • Increase age of retirement to 67 (discourage early retirement) • Create employment for over 50’s • Increase contributions • Encourage private pensions

  20. The Economy cont… • If these reforms not enforced, pensions set to account for 18% of GDP in near future • European level, Germany state pays relatively high amount into pension system • Predicted to rise by another 3%

  21. CONCLUSION… • Current PAYG system needs to be reformed otherwise the state will not be able to fund it • Need more uniformed system • Arrival of the new Chancellor- Angela Merkel gives rise to new hope for a swift and affective pension reform

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