Losing Faith Germans Knowingly Walk into the Pension Trap

Germans demand higher pension levels, but they refuse to pay more. A recent survey shows they've also lost faith in private pension plans.
The German babyboomer generation will soon hit retirement age, draining the fund for younger generations.

In 1997, four words uttered by then-Labor Minister Norbert Blüm burned themselves into Germans' collective memory. They were: "Your pensions are safe."

This assurance was given during a speech to Germany's lower house of parliament, the Bundestag. Two decades later, most Germans have lost faith in the sustainability and future solvency of their country's statutory pension scheme.

Normally, logic would dictate that if the state has lost the ability to provide for its citizens, then those citizens would find a way to provide for themselves. Unfortunately, Germans haven't just lost faith in their government - they've lost faith in their private institutions as well.

A new survey of 3,381 employees and pensioners in Germany, commissioned by the insurance company Axa, has revealed that 51 percent of Germans doubt the usefulness of planning ahead for retirement. The results of the survey were made available exclusively to Handelsblatt.

Most people have no interest in signing up for a new private retirement plan, and one-fifth of Germans mean to cancel their existing plan. What's more: Germans put aside 16 percent less for retirement in 2016 than they did the year before.

27 p37 Significant Differences-01

The Germans, it seems, are walking into a retirement trap with their eyes wide shut. First, a majority of workers feared they would not be adequately provided for later in life. They were afraid that their quality of life, the living standard to which they had grown accustomed, would be lost once they left the workforce.

But back then, people still thought they could do something about it. That's no longer the case today.

"People have become more aware of the problem of financial security in old age amid the broader, public debate before the upcoming elections, as well as the debate around low interest rates," said Axa's Chief Executive Patrick Dahmen.

Where earlier generations would simply throw themselves at the mercy of the statutory pension system, today's workers don't feel like they can afford to be so trusting.

For the first time, 61 percent of the survey's respondents said they would likely be unable to cope financially in old age. That's a staggering jump from 2016, when 44 percent of people queried responded so pessimistically. At the same time, a majority of the working population in Germany also has severe reservations about making preparations for the future through a private institution.

Fifteen years have gone by since the pension reforms and we still have yet to develop a culture of additional precaution. Christian Traxler, Economist at Berlin's Hertie School of Governance

Apparently, working Germans have not internalized the paradigm shift that was introduced during the pension policy reforms of 2001 and 2004, when the German economy's structural crisis was at its peak.

"Fifteen years have gone by since the pension reforms and we still have yet to develop a culture of additional precaution," said Christian Traxler, an economist from the Hertie School of Governance in Berlin.

Klaus Hurrelmann, a youth researcher from the University of Bielefeld emphasized that although younger generations are aware of the discrepancy, they're unsure what to do about it.

Back around the turn of the millennium, it was decided to cap compulsory pension contributions in demographically-challenged Germany at 22 percent of monthly income by 2030. In return, pension levels would not be allowed to fall below 43 percent of an employee's wage when they retired.

The problem is that only around one-third of Germans have signed up for one of the so-called "Riester Rente" scheme, according to the government's most recent pension report. The scheme used state subsidies to encourage people to invest in tightly regulated, private plans.

A further 30 percent of Germans have neither a company pension nor a Riester Rente. In the case of low-income workers, that number jumps to 50 percent.

Another survey also showed that a majority of workers don't believe they would be able to compensate for a drop in pension checks from the government by signing up for a private plan that was pegged to the market. A mere 13 percent of 680,000 members of the powerful IG Metall union had confidence in such precautionary measures, according to the survey, which the union conducted itself.

Nearly three-quarters of working Germans, therefore, are calling for higher state subsidies for occupational pensions as well as for requirements that all new employees sign up for them.

Germans have to put aside significantly more money than they would have just 10 years ago in order to accumulate the same amount of capital.

At the same time, however, the Axa survey demonstrated a downtick in Germans' willingness to save for the future. Today, people with jobs are only putting aside an average of €130 ($142) a month for their retirement, down from a year ago when they were saving €155 a month.

"People have understood  that they're not earning any interest with their savings accounts," Mr. Dahmen said.

In today's monetary policy environment, with interest rates at historic lows, Germans have to put aside significantly more money than they would have just 10 years ago in order to accumulate the same amount of capital.

For Dorothea Mohn from the Federation of German Consumer Organizations (VZBV), Germans' worries and frustrations are understandable. She lamented what she perceived as a "deficiency" in retirement plans, which she said the government had caused.

When capital market-based provisions were being built up, the state had failed to provide any assurances of the quality of the product on offer.

According to Ms. Mohn, inexpensive products without guarantees are the way to go. There are ample models for state-funded pension funds that are affordable and accessible, she said.

Politicians in Germany have already broached the issue of whether or not to push through additional pension reforms. German Labor Minister Andrea Nahles has proposed a reform concept for statutory pensions with which she hopes will prevent pension levels from falling further.

With federal elections scheduled for later this year, however, her proposals haven't yet found their way into her Social Democratic Party's (SPD) official program. That’s likely because costs for the minister’s proposal are too high and while Germans indeed want higher pensions, they are unwilling to pay more for them or see public debt rise.

The SPD's main competitor, the conservative Christian Democrats, led by Chancellor Angela Merkel, intends to stabilize pension levels by increasing the age at which Germans are entitled to a full pension.

Only one thing seems certain: Retirement discussions are due to be one of the hot-button issues in the run-up to the German election.


Anke Rezmer covers the investment fund industry for Handelsblatt out of Frankfurt, Germany's finance capital. Peter Thelen writes about social security systems, the job market and labor topics. To contact the authors: [email protected] , [email protected]