Insurance Czar State Pension System Under Stress

Germany's state-run public insurance funds for pensions, health care, home health care and unemployment benefits are about to go into the red, a government administrator told Handelsblatt. Working Germans could see higher deductions from their paychecks by 2018.
Germany's state-funded pension system is about to go into the red -- and workers in Europe's largest economy are about to pay more to support it.

Back in November, the German labor minister, Andrea Nahles, exuded confidence.

"The obligations of Germany's public pension system are reliable and solidly financed,'' Ms. Nahles said at the time.

Ms. Nahles, a member of the Social Democratic Party, the junior partner in Chancellor Angela Merkel's right-left coalition government, is the driving force behind Germany's new €8.50 per hour federal minimum wage, which took effect January 1, as well as a new law last year that enabled millions to retire at 63 with full state pensions.

On January 1, the government reduced the monthly pension contribution from 18.9 percent to 18.7 percent of gross wages, a cost that is split 50-50 by workers and their employers.

At the urging of Social Democrats, the government opted to use the surplus in the federal pension fund to pay for both reforms, which Ms. Nahles, a leader of the left-wing of her party, described as a way to correct a "fairness deficit'' in Germany.

But as she spoke back in November, €10 billion, or $11.2 billion, in extra costs were rolling in from the early retirement law, and another new law backed by Social Democrats and Ms. Merkel's conservatives that awarded social welfare payments to stay-at-home mothers.

The additional costs were initially masked by Germany's robust economy, which bolstered the reserves of the government's pension fund to a record €35 billion. The fund is financed by working Germans, who each month pay a percentage of their salaries and when they retire receive a state pension.

On January 1, the government reduced the monthly pension contribution from 18.9 percent to 18.7 percent of gross wages, a cost that is split 50-50 by workers and their employers.

The pension contributions are the biggest of four mandatory wage deductions in Germany that also include health insurance, nursing care insurance and unemployment insurance, which together amount to about 21 percent of a worker's average monthly paycheck.

Employers pay roughly the same amount to cover each worker.

In the past, the contributions into the mandatory insurance funds have typically been more than enough to cover their expenses.

 

German Pension Contributions and Pay-Outs-01

 

But in a country with a rapidly aging, longer-living population, the era of surpluses is rapidly coming to a close, said the newly appointed president of the German State Pension Insurance System, Axel Reimann.

In his first major interview since taking office, Mr. Reimann told Handelsblatt that Germans will have to gird for tough times and prepare to pay more each month to support the state-run insurance programs.

The decision to lower pensions contributions starting in January, and the costs of the new pension benefits and the rapid aging of Germany's population is forcing government pension fund managers to dip into reserves, Mr. Reimann said.

That means, basically, that Germany's government pension fund will likely begin to operate in the red, despite planned cuts in state pensions paid to Germans once they reach retirement age. The average pension payment is currently 50.5 percent of a worker's last gross salary, but by 2030, the government plans to reduce the benefits to just 43 percent of pre-tax salary.

In the interview, Mr. Reimann gave part of the blame to Finance Minister Wolfgang Schäuble.

The German government-run state pension fund delivered a surplus in 2014 of €1.7 billion. But this year, experts expect the fund to produce a deficit of nearly €4 billion, which is supposed to grow to €8.5 billion by 2018.

Mr. Schäuble reportedly cut the amount of money the German federal government contributes each year to the public pension fund by €4.75 billion since 2013 to balance the federal budget.

That balance sheet trick will likely create a deficit in the pension fund that is expected to top €8 billion by 2018.

By 2019, the pension fund's reserves are unlikely to meet the mandatory minimum level of 0.2 percent of monthly outlays, Mr. Reimann said. To avoid shortfalls in pension payments, Mr. Reimann said Germany needs to raise the reserve's minimum to at least 0.4 percent of monthly outlays, which would necessitate an increase in monthly pension contributions by all Germans starting in 2018.

Otherwise, the German government will risk another round of negative publicity similar to 2005, when federal authorities had to transfer €900 million into the government's pension fund to make payments for the month of December.

Germany's next federal election is in 2017, a year before the government would have to increase the monthly pension deductions to keep the fund solvent, according to Mr. Reimann. But the health of the pension fund is deteriorating rapidly, he said, and policymakers will probably be unable to avoid discussing the politically sensitive issue of raising contributions before the next election.

Last year, the funds that distribution pensions, health care, home health care and unemployment compensation delivered a surplus to the federal budget of €3.4 billion. Since 2010, the funds have generated an excess of €47 billion to the federal government, about a third of that from the pension fund alone.

But those good times are over.

Even Ms. Nahles can no longer deny the deteriorating financial situation.

According to her ministry, the pension fund delivered a surplus in 2014 of €1.7 billion. But this year, experts expect the fund to produce a deficit of nearly €4 billion, which is supposed to grow to €8.5 billion by 2018.

By then, the existing reserves in the fund will likely be exhausted. Under German law, the monthly contributions of employers and workers into the fund will have to be increased by 2019 at the latest.

In the fund that pays for public health care -- more than two-thirds of Germans are insured for health care under state-run plans -- reserves are dwindling rapidly.

And the pension fund is not an isolated situation.

In the fund that pays for public health care -- more than two-thirds of Germans are insured for health care under state-run plans -- reserves are dwindling rapidly.

In the third quarter of 2014, the health care reserves were roughly €16 billion.

But this amount shrank during the last quarter of last year to an estimated €12.5 billion amid higher-than-expected health care costs for Germany's aging population.

Exact figures are expected to be reported this week. But the level is certainly going to be less than the more than €30 billion level of just a year earlier. The main reason is Mr. Schäuble's reduction in federal subsidies to support the fund.

This year, Mr. Schäuble is planning to under-subsidize the public health insurance fund by €2.5 billion. The reserves are likely to further shrink as health care costs for an aging population continue to rise.

The pressure on the state agencies that operate the government's mandatory pension funds are only expected to increase. Under a new law, the German health minister, Hermann Gröhe, is only required to subsidize the health care and other mandatory insurance funds to a certain, predefined limit.

If the federal subsidies are not enough to cover a fund's costs, the fund must dip into reserves or raise contributions.

The outgoing president of the German Insurance Ministry, Maximilian Gassner, told Bavarian state broadcaster Bayerischen Rundfunk that many publicly run insurance funds will have to dip into their reserves this year.

If the trend continues, Mr. Gassner said that most of the publicly run funds will have to impose a special charge on German workers representing another 2.2 to 2.3 percent of gross wages. Currently, some funds impose an extra charge of 0.8 percent.

If Germany does not acknowledge the gravity of the approaching shortfalls, it could fail to meet the European Union's own budget deficit target. Better in this case for Mr. Schäuble to take the politically unpopular move and raise the monthly contributions.

 

Peter Thelen is a Handelsblatt editor in Berlin who covers the German social insurance system. To reach him: [email protected]