CDU pension plans leave open questions

The pension plans of Germany’s Christian Democratic Union (CDU) laid out in its draft party programme this week address the central issue of the stability of the first pillar pension system, but lack details and risk an increase in the complexity of the system.

The CDU is in favour of linking retirement age to life expectancy, by increasing retirement age, introducing mandatory funded pension schemes, and the so-called ”active pension” (Aktivrente), meaning cutting tax on wages of people who continue to work after reaching the statutory retirement age.

“The CDU is addressing a hot topic: the future financial sustainability of statutory pensions in Germany. Extending the working life of those who can work is a sensible update of the generational contract for the future, taking into account demographic changes,” Michael Karst, head of legal, tax and accounting in the retirement department at WTW, told IPE.

Introducing a new tax incentive for people working longer, after abolishing earning limits for early retirement, does not appear necessary, and could be problematic from an equal treatment perspective, he added.

According to Martin Werding, member of the German Council of Economic Experts (Sachverständigenrat), the solutions suggested by the CDU go in the right direction but need further details.

Raising the statutory retirement can reduce or even neutralise the pressure on the pension system exerted by the expected increase in life expectancy, he said.

“As the [CDU party] platform is not meant to be a programme for the next federal election, it leaves open many relevant details. For instance, it is unclear by how much the retirement age is to be increased, or how the suggested link to life expectancy will be designed,” Werding added.

Veronika Grimm, anther member of the Sachverständigenrat, proposed an increase in retirement age by eight months for every year increasing life expectancy.

The government is also planning to start an experts dialogue (Fachdialog) to discuss mechanisms to transition from work to retirement, to deal ultimately with the question of a possibly longer working like, and higher retirement age.

Linking retirement age to like expectancy would strengthen the first pillar, financially, even if this meant that people would have to work longer, and would therefore likely see this negatively, said Olaf Stotz, professor of asset management and pension economics at the Frankfurt School of Finance and Management.

Stotz suggested taking into account life expectancies for specific groups of workers, for example those who work harder, and have a lower life expectancy.

An automatic link between retirement age and life expectancy, with retirement determined exogenously, would mitigate political discussions about the “correct” age to retire, and risks of wrong political decisions, he said.

A further addition to a new mechanism would be making retirement age more flexible, Stotz added: “People value this flexibility. However, whether tax subsidies [active pension] are the right way to prevent people from retiring earlier, which many people want, is questionable on the one hand, and not even possible in many professions.”

For the second and third pillars, CDU’s proposals appear to Stotz “too vague or unrealistic”, making the pension system potentially more complicated, for example through mandatory funded pensions.

“Further details would also be of interest, for instance, on rules regarding investments in asset classes promising higher returns, and on a framework leading to lower costs of marketing and fund management than in existing, voluntary programmes for private old-age provisions,” Werding added.

“Mandatory funded pension provisions would make sense only in the absence of other forms of supplementary pensions, like company pension schemes,” said Karst.

“Instead of a mandatory requirement, it would probably be better to have an opting-out system for private pension provision,” to reduce the high level of complexity of the system, he said.

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