EUROPE - Federal transfers to the state pension system are the core cause of Germany's structural budget deficit, according to Pimco senior portfolio manager Andrew Bosomworth (pictured).
If the country’s new government did not pursue rigorous reforms in the labour market and social welfare system, demographic forces could lead the country into a debt spiral, said Bosomworth.
“Germany’s government must bring the state pension on to a stable financial footing in order to plug the structural budget deficit, and by doing so, my best guess is it will cause the ‘Sandwich Generations’ to save.”
Within the social welfare budget, federal transfers to the state pension system consumed 42% of total tax. The state pension system is financed by a separate 19.5% payroll tax of which half is paid by the employer and half by the employee on income up to € 62 400 per annum.
Because revenue into the pension system is dependent on the level of employment, persistently high unemployment in recent years has lead to insufficient payroll taxes to cover state pensions, leaving government to finance the shortfall, said Bosomworth.
Of the € 237.5bn transferred to pensioners by the state pension system in 2004, payroll taxes fell short to the tune of € 77.9bn, which was met by the Federal government.
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