No one wants to really think about it, but the idea of carefree retirement with a lavish state pension might be a thing of the past. Does old-age poverty await us all? Seymour Gris assesses the risks.
When you talk to a 22-year-old about getting old, her greatest preoccupation might be the looming terror of her next birthday: the horrific, unthinkable age of 23. Actual old age is probably the last thing on her mind, and the financial issues surrounding the distant future 40-50 years down the road are off the radar screen for most 20-somethings.
Anna, a 22-year-old German marketing specialist who works at an internet start-up in Mitte, is typical: every month when she sees her pay slip she rolls her eyes at the 19.6-percent chunk known as Rentenversicherungsbetrag (pension contribution) taken out of her pay, half of which is covered by her employer. “I don’t want to pay for this. I’m never going to see any of this money back. I probably won’t even live past 30 anyway!” But what about the fact that her contributions are actually covering the pensions of people like her own grandmother? She responds with an exasperated shrug.
Unlike Anna, Lina (31), a Swedish designer working in Berlin, doesn’t resent paying for today’s elderly. “I benefited from things they paid for – I went to school for free.” But she does share Anna’s uncertainty about the future of the pension system: ”There aren’t going to be enough young people to pay for the old, and we’re not doing enough proper work to save up for it. And we have no idea what is going to happen in the EU.”
Angela, a Hungarian dancer turned pilates teacher, and her American musician husband Bob are both 44. They won’t be relying on their state pensions when they get older: “Every year we get a letter from the Gesetzliche Rentenversicherung (state pension insurance) saying we’ll get €300 a month when we retire!” Angela worked six years as a performer in the German version of the musical Cats, but she didn’t work long enough as a full-time employee to qualify for a higher pension. Now both she and her husband are freelance. Bob is a session drummer and member of the Künstlersozialkasse, through which he also makes pension contributions – but not enough to make a big impact. Luckily they have been able to buy two flats in Prenzlauer Berg, one to live in, another one they’ll rent out: an investment for old age.
But not all freelancers, people with small businesses or those in precarious employment situations can afford to buy property. Right now, pension contributions are voluntary for the self-employed in Germany, so many don’t save sufficiently for old age, meaning a huge number of them will probably end up on the minimum pension (about the same as current Hartz-IV benefits). Even more shocking, perhaps: the latest government report on the issue says a lot of normal salaried workers who paid into the system for decades could end up facing old-age poverty as well.
A lost golden age
The good old days of Ruhestand (literally, retirement as a state of peace) certainly won’t be what they were in the 1970s and 1980s, when pensioners could expect to receive a monthly check as high as 60 or 70 percent of their final salary. German pensioners are still famous around the world for their love of travel, cruises and second homes in faraway, sunny locations, but in the future far fewer people will have access to such an opulent senior lifestyle. In September, German Labour Minister Ursula von der Leyen (CDU) announced a shocking truth: workers earning €2500 per month (not exactly a pauper’s wage) who work full time for 35 years won’t receive more than €688 per month if they retire after 2030. That’s the same minimum welfare payment (Grundsicherung) given to people who haven’t worked a single day in their lives or paid a cent into the pension insurance system.
Compared to crisis-battered Greece and co., where pensions are getting slashed, Germany is not doing that badly. The economy is still healthy, hence there are still plenty of workers paying into the pension fund. Nonetheless, the politicians and the media seem intent on playing up the problems and playing with people’s insecurities about the future.
Severin Schmidt of the Friedrich-Ebert Stiftung, a think tank affiliated with the SPD, says, “Since the 1990s, politicians have been stoking people’s fears about the pension system. There are clear business interests at play. Their message is: the state pension is insecure, so you have to pay into a private pension. It’s a multi-billion euro business.”
The pressure coming from the insurance industry is no secret and takes on various forms. For example, a recent survey found that 49 percent of Germans feared they wouldn’t have enough money after retirement, and 90 percent felt the pension system needed reform. The survey was financed by Gothaer Versicherungen, one of Germany’s oldest and biggest insurers. With surveys like this, it’s not hard to get the results you want by shaping the questions – and then disseminate said results in the press with quotes from insurers demanding more public subsidies for private pension plans, as Gothaer chief executive Werner Görg did in an article in Handelsblatt in October.
Freelancers and immigrants to the rescue?
Most experts and politicians agree on one thing: if we want to save the pension system, more people – including the self-employed – will need to contribute to it. ”There are more and more people in precarious work situations,” says Schmidt. “Small entrepreneurs, freelancers, people in the creative industries. I would universalize many components of the social security system, open up the public pension system to as many people as possible, including the self-employed. This would be a way to get more people and funds into the system, hopefully preventing mass-scale poverty later.”
In May of this year, Von der Leyen announced plans to impose a mandatory minimum contribution of around €300-350 per month upon all self-employed workers (except for those lucky enough to be in schemes like the Künstlersozialkasse). But the proposal was predictably met with fury in the start-up scene. The new freelancer tax would stifle innovation and discourage entrepreneurial risk-taking, it was claimed. After 80,000 people signed an online Bundestag petition against it, Von der Leyen backed down to rethink her plan, but some form of mandatory pension insurance for the self-employed is slated to start as early as July 2013.
Another way to ensure ample liquidity could be to import more workers to perform the jobs of the future, which will include taking care of the growing number of elderly. By the time Anna hits retirement age around 2060, the German population is predicted to have dropped by at least 10 million, thanks to the country’s low birth rate. ”Germany is in drastic need of more immigration,” explains Schmidt, “especially in social fields: kindergartens, old-age care. Without immigration we won’t be able to survive.”
Others believe the social security system will simply have to be scrapped for a brand new model. One such model is what is known as the bedingungsloses Grundeinkommen – a flat rate payment paid by the state to everyone, regardless of their age, work status or income. If you believe Von der Leyen, a lot of us are heading towards this anyway. Its proponents can be found in the smaller parties: the Greens, the Pirates and Die Linke. They say such a move from a contributions-based pension system would remove the fear of old-age poverty and eliminate bureaucracy and waste along the way.
A redeemable future?
Schmidt is sceptical of radical solutions like the bedingungsloses Grundeinkommen: “The idea that you can solve all social problems with one big radical change is an illusion. There are so many different questions that have yet to be answered about that model.”
Although public faith in the pension system has hit rock bottom, Schmidt explains why he is less pessimistic than most. “The pension system isn’t only dependent on the age structure, but on the number of people working. For example, in Germany there are big labour reserves among women. So we need to get more people working. The future of the pension system is also dependent on productivity of the economy as a whole. When I look at those two factors, I don’t see a disaster on the horizon.”
In short, it all sounds like a vast “known unknown” (as Donald Rumsfeld would say), somewhere between doom and optimism for the future. Our advice to 22-year-olds like Anna: don’t despair, but do start stacking pennies now… or else live for today and hope for the best.