Chancellor Olaf Scholz rejects a higher retirement age. But how should pensions be financed in an aging society?
Olaf Scholz strictly rejects raising the retirement age. At the same time, the Chancellor promises not to lower the level of pensions.
How can this work in a society that is foreseeably aging; in which the ratio of retirees to actively employed people is rising rapidly?
Without long-term work, stable pensions are only possible if the state’s contributions or subsidies increase significantly, economists warn. The start of retirement should therefore be linked to life expectancy. “That doesn’t make sense,” says Scholz. A fact check.
At 65, Olaf Scholz has almost reached retirement age. But he’s not thinking about retirement. He wanted to remain chancellor for a “very long time,” said Scholz at one “Heilbronn Voice” event. The SPD politician made people sit up and take notice with another statement about pensions. Scholz strictly rejected the suggestion from his own council of experts to extend working life as life expectancy increased. “Because it’s wrong and doesn’t make any sense,” he said, dismissing the economics.
It is not the first time that Scholz has clashed with economists. After Russia’s attack on Ukraine, economists had analyzed that Germany could actively boycott Russia’s gas. The consequences for the economy would be noticeable but manageable. Scholz called this irresponsible. Soon afterwards, Putin turned off the gas to Germany. The consequences were quite close to the economists’ forecast.
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So now the pension. The topic will shape Germany in the next few years. The reasons are demographic change and a famous mistake in the original pension reform of 1957. It marked the start of the pay-as-you-go system with a dynamic increase in pensions. This means that no capital is saved for future pensions. Rather, the active employees pay the pensions of the retirees, which increase with the salary level of the active employees. That would be fine, said the first Federal Chancellor Konrad Adenauer, because: “People always have children.” What a mistake.
From the 1960s onwards, the “pill kink” caused birth rates to fall. At the same time, life expectancy increased. The number of people retiring began to grow, and fewer young people came along. For a long time, this was a gradual process, cushioned by more working women, constant immigration, increasing productivity and strong economic growth. But in addition to the contributions, the state’s subsidy to the pension fund has already increased, financed through taxes from active members.
But now things are moving at a gallop: in the next few years, the strong baby boomers will be retiring. Fewer young people are starting their careers. The first consequence is that a hole opens in the labor market. There is already a shortage of 1.7 million workers in Germany.
It will be difficult enough to fill this gap. More full-time instead of part-time, higher employment among women, the activation of the unemployed and more immigration can contribute to this. But even if this were to succeed, employment would only be stable. Employees would still have to pay for significantly more pensioners.
Demographic developments can be calculated. The problem has been known for a long time, the facts are hard. But the temptation in society and politicians to suppress them was just as persistent. The problem would only arise in the future. But now that future is here.
The ongoing topic of pensions: In 1986, Social Affairs Minister Norbert Blüm put up his famous poster: “One thing is certain: the pension”. On the left, Hubertus Pellengahr adds a warning to politicians for the New Social Market Economy initiative. Bernd von Jutrczenka/Peter Popp/dpa
Olaf Scholz and the pension: “Afterwards it’s good”
This is what the economists have now pointed out. “With the retirement of the baby boomers, an acute phase of demographic aging is currently beginning in Germany,” they write in their reports. “In Germany, the strongest aging surge will take place in the next 15 years.” Without change, there would be a risk of falling pension levels, rising contributions and higher federal subsidies. As one of several reforms, the economists propose linking the retirement age to the development of life expectancy. Countries as diverse as Denmark and Finland, Greece and Italy or Estonia and Portugal have already done this.
Scholz was asked in Heilbronn whether an extension of his working life would be possible. Answer: “No”. Question: “Why?” Scholz: “Because it’s wrong and doesn’t make any sense.” The retirement age has already risen to 67 years. “But after that, I think it’s good,” said Scholz.
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Anyone who leaves school at 17 and starts an apprenticeship has 50 years of work ahead of them. “50 years is a pretty long time,” said Scholz to applause. He did not say that life expectancy in retirement has become “quite long”. Nor how the pension should be financed. But one shouldn’t have “this stupid discussion about retirement age again,” said Scholz.
So what makes sense in “this stupid discussion”. Some key data:
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Demographic change, pensions and the labor market
Demographic change is not a theory, nor is it about small numbers. Change is here and with force. Every year, many more older people are leaving the workforce than young people are starting their careers.
In 2021, there were 50.3 million people of working age living in Germany, writes the Council of Experts. According to simulation calculations, by 2080 there will only be 45.5 million.
In contrast, the number of people of retirement age will increase from 17.6 million in 2021 to around 20 million by 2035 and further to 21.3 million by 2080.
Ratio of active employees to pension recipients
What is important for pension funds is not the number of pensioners, but above all the ratio of retirees to employees. And that gets out of balance. The old-age dependency ratio, i.e. the relationship between the two groups, “will almost double between the years 2000 and 2035,” write the economists. “In 2022, for every person aged 65 and over in Germany there were around three people aged 20 to 64. From around 2040 there will probably only be two people.”
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Longer life expectancy after retirement:
There is a very happy reason for this. The average lifespan after retirement has increased significantly and is expected to continue to increase. In 1980, men lived an average of years after retirement and women lived 13.8 years. In 2022, life expectancy after retirement was already 18.8 years for men and 22.2 years for women. An increase of 60 to 70 percent.
Pension contributions: a reminder from economists
Pension contributions in Germany have been stable at an elevated level for years. They are levied on gross income up to a contribution limit of currently 7,300 euros and are paid equally by employees and half by employers. So they reduce incomes and make work more expensive.
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The economists have calculated for two scenarios how these pension contributions, but also the pension level, and the federal subsidy to the pension fund would have to develop if the current law and demographic developments are taken as a basis. The blue arrows show the base scenario. The orange arrows take into account the promise to keep the pension level stable at 48 percent.
Council of Experts for the Assessment of Overall Economic Development, Annual Report 2023/24
In the base scenario, the tenten level falls to 47.3 percent by 2025. Nevertheless, the contribution rate will rise from 18.6 to 20.9 percent – and further to 24.1 percent by 2080. If the pension level is stabilized at 48 percent, the contribution rate will rise more significantly – to 26.0 percent by 2080, the experts calculate.
Federal pension subsidy: Largest item in the budget
The same applies to the federal subsidy for pensions, which taxpayers have to pay for. The total of all federal funds for pension insurance will already amount to 111.9 billion euros in 2023. These are
23.5 percent of the federal budget. The pension subsidy is already the largest item in the budget.
The federal subsidy for pensions corresponds to around two percent of the gross domestic product. In the calculations of the Council of Experts, under current law it would have to double to around four percent of GDP due to foreseeable demographics.
“Overall, the financing of the statutory pension insurance (GRV) is increasingly placing a strain on both contributors and public budgets,” write the experts. “Although the payments to be made are increasing, the expected benefits from the GRV are decreasing: their return on contributions will be significantly worse for younger cohorts than for the current generation of pensioners.”
The economists warn: “Specifying the level of security, as the federal government is currently planning, is not a sustainable solution, but will actually increase the foreseeable increase in contribution rates.” They warn of the consequences: “This will exacerbate the distribution conflicts between employees and retirees.” The problems can no longer be postponed. Demographic change is here. If Olaf Scholz fulfills his wish to remain chancellor for a “very long time”, this “stupid discussion” will continue to concern him frequently.
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