Germany has a record open job vacancies: in the first quarter of 2022, they reached 1.74 million, the highest figure since the country’s reunification in 1990.
At the same time, there is a pronounced aging of the population: in July, only 10% were between 15 and 24 years old, while 20% were over 65 years old. The national birth rate is too low to compensate for this trend, and one consequence is that the state pension system is under severe strain.
As a countermeasure, in early August the president of Gesamtmetall, the federation of employers’ associations in the metallurgical and electrical engineering sectors, Stefan Wolf, proposed raising the retirement age to 70 years. Unions, social groups and the left reacted furiously.
Left party leader Dietmar Bartsch called the idea “antisocial bullshit”; while Labor Minister Hubertus Heil of the centre-left SPD (Social Democratic Party) dismissed the proposal as a “ghost debate”.
Trial by fire for the German pension system
At the moment, the country is in the process of gradually raising the minimum age for those born after 1967 from 65 to 67. Indeed, economists have been warning since the 1980s that the German pension system is threatened with collapse.
In response, the then Minister of Labor, Christian Democrat Norbert Blum, assured in 1986: “Pensions are secure.” Today, however, this assertion is difficult to sustain.
In Germany, pensions are mainly financed by a kind of “pay-as-you-work” system: most citizens – with the exception of civil servants and the self-employed – contribute to the state pension fund, with which pensions are paid to those who already fulfilled their term of service.
Currently, salaried employees contribute just over 9% of their salary, with the employer having an equivalent rate. However, this type of system only works if there are enough active workers to cover ongoing pensions. And this is where population aging becomes an issue.
“Raising the retirement age is always a very unpopular measure, so it is postponed as long as possible by politicians,” notes Johannes Rausch of the Munich Center for the Economics of Aging (MEA). “But I can imagine that in the mid-2030s, when we’re in the midst of the demographic shift, something is going to happen.”
He predicts that sooner or later the retirement age will rise to reflect rising life expectancy. In this way, there would be enough taxpayers to finance the system, avoiding an increase in tax rates and allowing for higher remuneration.
Immigration and integration into the formal labor market
Germany would not be alone in introducing such a measure: the OECD (Organization for Economic Co-operation and Development) anticipates that the average retirement age for those who have been continuously employed will rise to 66.1 years for men and 65.5 years for women.
In countries where the retirement age is already linked to life expectancy, including Denmark, Italy and Estonia, a significant increase in the beginning of retirement is already outlined.
Johannes Geyer, deputy director for public economics at DIW (German Institute for Economic Research), believes that the quantitative effect of such a measure would be merely symbolic.
“It’s a question of distribution: who bears the brunt of demographic change? Raising the retirement age puts great pressure on the working population. Those with low life expectancy and health problems will suffer the most: a relevant part of the population dies before reaching retirement.”
“We need immigration. It’s essential to have enough people coming to Germany from abroad,” Geyer continues. “The government is trying to make it easier for immigrants to recognize qualifications. We also see some improvements in regulations for asylum seekers and those with ‘tolerated’ status, so that their stay is legalized and professional titles obtained outside Germany are recognized. it’s a problem.”
In addition, there are domestic potentials: “We have a large sector of those who work in the so-called ‘mini-jobs’, that is, marginal jobs, poorly paid and not subject to taxes or social security contributions”, emphasizes the DIW specialist. . “If we can transfer these people to regular jobs, that would also help the system.”
Longer journeys, greater contributions
Another potential resource would be to provide employment for the unemployed and rehabilitate those forced into early retirement due to health problems, the DIW deputy director continues. This is the case for millions of individuals, although many of them are unable to work full-time, for reasons ranging from their own medical condition to their commitment to caring for their family members.
Geyer also suggests that civil servants and the self-employed, who currently contribute to separate pension funds, should be integrated into the general state retirement system.
Finally, there would be another relatively popular solution: increasing the working week from 35 to 42 hours. But here Geyer is skeptical: “I think in many industries 40 hours is the most you can expect anyone to work. If you increase working hours, you have to consider that employees are already exhausted, and that these additional hours will contribute to to exhaustion, with a negative impact on health.”
In any case, by 2025 the economist expects an increase in contributions to the retirement fund, from the current 18.6% to well over 20%.
He points out that “ten years ago, nobody would have expected them to still be below 19%”: “Before the war in Ukraine and high inflation, I would have said that we could afford to raise contribution rates, but due to high inflation , this will spark a rather heated debate.”
For now, Germany can still take some time to find a solution, but the likelihood is that changing demographics will eventually force the country to act on retirement.
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