GERMANY - Experts have criticised the last minute concessions made to the German pension reform bill, calling them "utterly ridiculous".
In a bid to appease the left-wing Social Democratic Party, the new bill now stipulates that the government has to “make proposals” if benefits fall below levels of 46%. “Action” has to be taken if benefits fall below 43%.
Axel Boersch-Supan (pictured), director of the Mannheim Research Institute for the Economics of Ageing and one of the architects of the pension legislation said: “The concessions given in the last-hour contradict the original premise which was that the pensions level has to be determined by the sustainability factor. Some people in the Social Democratic Party wanted to a have a minimum level which was incompatible with the rest of the reform package and that is logically nonsense.
“The idea is essentially to move from the defined benefit system to a defined contribution system. Now obviously, there is always risk in a pension system. A DC system controls the risk through contributions and not through benefits.”
Boersch-Supan added that the new clause introduced was not compatible and therefore “illogical and fairly ridiculous.”
“It says that if benefits fall below 46%, then the government must propose how benefits can be frozen at 46%. But they don’t say in which direction it can go.
“The system as it was decided last week will deliver something between 43-44% until 2030. Postulating 43% doesn’t do any harm but postulating 46% is impossible, unless contributions or the retirement age are raised.”
The reform process which is aimed at slowing down the annual rises in pension benefits in the face of the rapidly ageing population guarantees that contributions will stay under 20% until 2020 and will remain under 22% until 2030.
Boersch-Supan said that in 2008, there is likely to be another pension reform which will increase the retirement age, putting the system on a “sustainable path.”
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