Ensuring the long-term security of pensions—that is the federal government’s mandate. Now, the “traffic light” coalition has officially approved its long-awaited pension package. The package must now pass the Bundestag.
The decision ends a months-long dispute in which the FDP, in particular, had stood in the way. Christiane Benner, First Chair of IG Metall, says: “The FDP must finally realize: Those who play games with social policy squander trust.” Anyone who undermines the statutory pension system jeopardizes intergenerational solidarity. “We’re pleased that the Federal Minister of Labor stood his ground.”
What exactly is included in the new pension package?
“Pension Package II” sets two important courses for the future of the statutory pension insurance system.
Number one: The so-called pension level is to be stabilized in the long term and will not fall below 48 percent at least until 2039. Until now, this stabilization was limited to 2025.
Number two: In addition to the stable pension level, Pension Package II includes what’s known as “generational capital.” This means the federal government will initially invest 12 billion euros in the capital market through a fund. Additional funds are to be added each year. The returns from this investment are intended to relieve the burden on the pension fund in the future.
What does the pension package mean for today’s retirees?
The long-term stabilization of pension levels is good news for retirees. In the coming years, the baby boomers—the so-called “baby boomer generation”—will be retiring.
Under the previous legal framework, this would have resulted in a sharp decline in pension levels. Pensions would thus have been decoupled from general wage trends. Retirees would have suffered a massive loss of purchasing power relative to the working population. The new pension package prevents this for the time being.
Background: The pension level indicates what percentage of the current average wage a person receives as a pension if they have worked for exactly 45 years at the average wage and paid pension contributions accordingly. A declining pension level means that pensions are rising at a slower rate than wages.
What does the pension package mean for future retirees?
Those who still have years or decades to go before retirement also depend on a stable pension level—almost even more so than today’s retirees. A stable pension level means that pensions rise in line with wages, so they do not lose purchasing power. With a stable pension level, workers do not have to worry that their retirement benefits will become less secure.
Is the pension secure now?
At least more secure than before. Stabilizing the pension level makes the statutory pension a more reliable cornerstone of retirement planning. This reduces the risk of ever-widening pension gaps that people would otherwise have to make up for through private savings.
“Pension Package II halts the planned devaluation of pensions for another 15 years,” explains Hans-Jürgen Urban, a member of the IG Metall executive board responsible for social policy. “This is an important milestone!”
However, it is also clear that the federal government’s plans fall short of the coalition agreement. The agreement states that the pension level is to be secured “permanently” at 48 percent. Now, this stabilization is initially planned to last until 2039. For the period thereafter, a future federal government has been tasked with reviewing the situation. Furthermore, IG Metall states that a pension level of 48 percent is insufficient. A fundamental reform of the pension system is still pending (see below).
What is “generational capital”?
With “generational capital,” the federal government aims to harness the capital markets for the statutory pension insurance system. Every year, a sum in the double-digit billions is to be invested. The returns from this investment are intended to strengthen the pension fund.
Generational Capital is based on an idea from the FDP. The party originally wanted to introduce a true“stock market pension”—that is, investing pension contributions on the stock market. Instead, the money now comes from the federal government, which is taking out loans for this purpose. As a first step, the federal government is investing twelve billion euros in Generational Capital.
Is the Generational Capital Fund risky?
It’s just as risky—or not as risky—as investments in the capital markets tend to be. The return could be good—but there could also be losses. In any case, the Generational Capital brings pensions closer to the risks of the financial markets.
Experience to date gives little cause for optimism. The “Long-Term Care Provision Fund” averageda 2.6 percent annual return through 2020. The fund incurred significant losses at times through stock trading. The fund has been in existence since 2015. It is intended to secure the financing of long-term care in the 2030s—much like “Generation Capital” is intended to shore up the pension insurance system. However, because “Generation Capital” is financed through loans, interest costs must be deducted from the expected return.
Still, pensioners do not bearthe investment risk; even in the event of losses, their pensions would be protected. The returns from the “Generations Capital” are intended to stabilize the contribution rate and reduce the federal government’s subsidy to the pension insurance system. If returns are positive, this would ease the strain on the federal budget. If there are losses, the federal government would have to step in and pay more into the pension fund than planned.
What does IG Metall propose for pensions?
From IG Metall’s perspective, the financial markets are not a solid foundation for the statutory pension system. They fluctuate too much. The pay-as-you-go system, on the other hand, has proven to be stable and extremely flexible for many decades.
IG Metall wants to further strengthen the statutory pension system. A stable pension level is a key component of this—and has been part of IG Metall’s pension plan as an interim step since 2016.
In the next step, we want to raise the pension level to about 53 percent. This corresponds to the level from the year 2000.
To ensure the long-term stability of the pension insurance system, we want to restructure it on the basis of solidarity: into an insurance system for the working population, into which everyone contributes—including civil servants, the self-employed, lawyers, and pharmacists.
All information on IG Metall’s pension plan is available here.
