German government agrees first-pillar reform

GERMANY - The governing Conservatives and Social Democrats have agreed details for a major reform of the state pension scheme, to include hikes in the retirement age and the statutory contribution on the one hand and cuts in the state benefit on the other.

Under the reform, the legal retirement age will be raised incrementally to 67 by 2029 from 65 now, with the process beginning from 2012. Workers that pay into the state pension scheme for 45 years will also be eligible for the full benefit.

Moreover, those who retire at 63 but have contributed to the scheme for 35 years will also get a full state pension - but only until 2023.

The labour ministry reckons, however, that only 40% of Germany's workforce will actually retire at 67.

At the same time, the reform provides for an increase in the statutory contribution to the scheme to 20% from 2020 and to 22% from 2030. This contribution is already set to rise to 19.9% from January 2007 compared with 19.5% now.

On the benefits side, the full state pension is set to decrease to 46% of former salary by 2020 compared with 54% currently. By 2030, the benefit will further decline to 43%.

Yet to cushion the blow of the benefit cuts, the reform permits parents who take time off work to raise children (until the age of 10) or take care of the elderly to have that time counted towards their benefit.

And to compensate for the raising of the retirement age, the reform further contains incentives for firms who hire German workers over the age of 50. As a result, the government will subsidise part of the labour costs for these workers and provide money for retraining.

Speaking in Berlin after agreement between the governing parties, Klaus Brandner, the SPD's social policy spokesman in parliament, said the reform "does not overburden any worker".

The reform is to be approved by the federal cabinet next month and then be sent to the Bundestag, or lower house of parliament, the following month. Assuming its approval by the Bundestag, the reform will take effect in early 2007.