Retirement debate Germany's Baby-Boomer Burden

Germany's decision to lower its retirement age will cost more than expected.
Senior woman relaxing in park. Source dpa
Senior woman relaxing in park. Source dpa

 

Germany’s controversial decision to lower its pension age from 65 to 63, at a time when the country faces acute labor shortages, will cost the government more than it had expected.

More workers than anticipated have decided to take advantage of new laws that allow people who have worked for at least 45 years to retire at 63 without financial penalties.

Thorben Albrecht, a deputy labor minister, said that 163,000 people had applied for early retirement by the end of October. The government expected the figure to hit 240,000 by the end of the year.

A spokesman for the government pension fund, the Deutsche Rentenversicherung, said that the changes would cost the country’s pension fund €1.5 billion euros ($1.9 billion) in 2014, instead of €900 million as earlier forecast. It also expects the cost for next year to be around €2.75 billion, higher than the €1.9 billion it had originally thought.

Part of these costs can be explained by looking at the way the government calculates the cost of retirement. Earlier figures relate to the cost of pension payments, but the new numbers also include the amount of money that is lost when workers retire and stop contributing to the social security pot.

But even taking this into account, the costs are still higher than anticipated, and highlight the fact that in Germany, a shrinking number of workers are having to pay for an expanding group of pensioners.

Chancellor Angela Merkel of the Christian Democrats, the CDU, drew heavy fire earlier this year when she decided to lower the age of retirement to 63. She made the move as part of negotiations with the center-left Social Democrats, the SPD, who are her partners in a coalition government. The change, however, has angered many in her own party, who believe Germany needs to focus on getting people into the labor market, not on allowing them to exit it.

In Germany, a shrinking number of workers are having to pay for an expanding group of pensioners.

Paul Ziemiak of the CDU youth wing told Handelsblatt Global Edition: “Some of the policies of our government, such as lowering the retirement age to 63, put a burden on future generations and decreases our country’s competitiveness.”

Germany has one of the oldest populations in Europe. At the moment 20.7 percent of the population is aged over 65, compared to 17.4 in the European Union as a whole. By 2030 the figure is forecast to rise to 28.8 percent in Germany, compared to a European average of 22.6 percent.

The country also faces an acute skills shortage, and by 2040, the German economy will lack 4 million workers, according to Prognos, a Swiss research institute.

Christian Böllhoff, head of Prognos, argued in Handelsbatt that the most effective way of addressing this is to expand the workforce by encouraging groups that have worked little or not at all. This applies especially to older people and women. Eight of 10 women in middle-age groups are employed today but this figure needs to hit 90 percent or more, he said.

More than 90 percent of middle-aged men now work, but here also there are reserves to be mobilized. The danger of Germany’s retirement program is also that it takes out precisely the highly skilled, experienced workers that companies need most, both to keep production efficient and to train new recruits. The Institute for Employment Research (IAB) estimates that two out of three people who have applied for retirement this year are male, and many of them are well-paid skilled workers who are well trained and have good pension schemes.

Eric Schweitzer, President of the German Chamber of Commerce, told German newspaper Taggespiegel that German companies were already suffering from a “professional bottleneck” at some levels and were struggling to recruit experienced workers. “The danger is that after a few lost years we lose operational knowledge,” he said.

The legal age of retirement has also become a battleground in the debate over who is right and who is wrong within the euro zone.

Greece had a legal retirement age of 61, which became a huge source of resentment in Germany after the Mediterranean country was bailed out, partly with the help of German funds. Greece raised its age to 63 but the move was scorned at the time by Germany, which had in 2007 raised its retirement age from 65 to 67 and implemented labor-market reforms, known as the Hartz reforms, which cut unemployment benefits. The moves were hugely unpopular in Germany at the time and contributed to the demise of the center-left SPD party.

Now that the SPD is back in power as part of a coalition government, it has pushed hard for the lower retirement age. But the move came as Greece and Spain agreed to raise their retirement age again from 65 to 67 and Portugal pushed the number up to 66.

In April, the German E.U commissioner, Günther Oettinger, said in an interview with Die Welt newspaper that Germany’s plans sent the wrong signal to southern European countries which had been ordered to implement harsh labor market reforms. “We expect Greeks to work longer for less pay. They are now wondering that Germany is going in the other direction.”

 

Meera Selva is an editor for Handelsblatt Global Edition in Berlin. Carsten Brönstrup and Rainer Woratschka from Tagesspiegel contributed to this article. To contact the author: [email protected]