Pete Haan, head of the department of public economics at the German Institute for Economic Research (DIW), has called the government to reform the basic pension (Grundrente) introduced a few years ago into a “real minimum pension” also benefitting people contributing for old-age pension provisions for a shorter period, a pre-condition for future reforms.
The model currently in place for basic pensions in Germany guarantees a pension supplement but not a minimum pension, focusing on one group of people that have been insured for a long time, and low earners, but not reaching many groups particularly affected by poverty, he wrote in an article in the Wirtschaftsdienst magazine published by the Leibniz Information Centre for Economics (ZBW).
The Grundrente has reduced so far the risk of poverty by around 2 percentage points since it was introduce in 2021, failing to make a string contribution to tackle the problem, according to Haan.
A study conducted by Johannes Geyer, deputy head of the state department at DIW, and Haan, based on statutory pensions data, shows that significantly fewer people benefit from the basic pension than what was assumed when the legislation was enforced.
A key reason for this is that more than half of the people who meet the requirements to receive the basic pension are not entitled to a supplement following an income screening.
In 2022, around 1.1 million people received supplements through the basic pension, well below the government’s estimated 1.3 million. Women in particular benefit from the basic pension supplement, as raising children, part-time work and lower wages lead to lower pension entitlements.
Therefore, Haan argued, it is necessary to determine how relevant income screening is, at the same time boosting funds to finance basic pensions through taxes. Currently less than €2bn per year are deployed to fund the Grundrente.
Basic pension as prerequisite for reforms
Pension policies will have to deal with the financial stability and sustainability of the first pillar pay-as-you system, shortage of skilled workers, and reinforce the function of the first pillar as an anchor of security for people.
According to other research, without reforms, the level of security in old age, defined by the ratio between the standard pension and social security contributions, exposing old-age poverty, will decline from 48% in 2023 to 45% by 2037.
Pension reforms, an increasing number of people not subject to social insurance contributions, and of low-earners, increase the potential risks of poverty in old age as pension levels fall, Haan wrote.
The German government is working on multiple fronts to reform all three pillars of its pension system, extending the working life to increase the employment rate during retirement.
It will start discussions with social partners about possible conditions to encourage people to work longer, mobilising workers to fill in gaps in the labour market.
An effective basic pension is an important prerequisite for further pension reforms in Germany, such as increasing the retirement age or setting up a stronger (funded) private pension system, Haan wrote.
These reforms have potentially negative impacts, especially for low-earners, he said.
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