Mutual funds have become more attractive following new German pension reforms, according to the Mannheim Research Institute for the Economics of Ageing.
But, a report by Deutsche Bank Research published last week, ‘Pension reform 2001 - Germany on the way to a durable pension system’, reckons Germany still has a long way to go down the road of reform before its pensions system comes up to scratch.
Elsewhere, Professor Reinhold Schnabel of the University of Essen, has criticised the German government for using predictions with unreasonably optimistic assumptions.
In May the German government announced that State pensions will be reduced from the current 70% of the average wage of the employee’s working life to an official 68%. Starting in 2003, the gross income basis for calculating the initial state pension is reduced by 0.5 percentage points each year until 2011. From 2011 the basis for calculating the initial state pension will only be 90% of gross income.
To compensate for the reduction in the pay-as-you-go-financed state pension, private saving for retirement will be financially supported, although not made mandatory. Up to 4% of gross income can be saved in a pension fund. The employee is not bound to the employer any more than with other forms of occupational pensions such as direct promises (book reserves), support funds, direct insurances and Pensionkassen.
These other forms of occupational retirement saving - excluding book reserves - are eligible for support as well.
Any such savings vehicle has to fulfil certain criteria, such as:
*Guarantee of at least the nominal value of the contributions *No payments until the age of 60 or during accumulation period *Life annuity or capital withdrawal plan that reverts to life annuity at the latest age of 85
A maximum of two contracts per person are eligible for state support. Although anyone in the social security network is eligible for support, this generally excludes the self-employed and employees of the state. Employees are also allowed to withdraw money that they already saved out of their retirement savings for the purpose of building homeownership.
However, Professor Schnabel has studied different scenarios, including the one used by the government, and showed differences between them. The scenario which he calls realistic has a higher increase than the government’s in life expectancy, a lower reduction in unemployment, a lower increase in the employment rate, and a lower increase in the retirement age.
In addition, Deutsche Bank Research (DBR), has said the statutory pension insurance scheme is still not adequately equipped to cope with expected demographic changes in the coming decades.
DBR’s report, written by Dieter Bråuninger, asserts: “It will probably not be long before a further overhaul (e.g. an increase in the official retirement age) proves essential if contributions and the pension level are to remain within the targeted limits. Retirement provision for public-sector workers should also be subjected to close scrutiny. A greater degree of funding could help to alleviate the financing problems looming in this sector.”
It adds: “The over-regulation of the market for incentivised pension products, which threatens to put these products at a yield disadvantage compared with other forms of saving ... and the creation of a type of pension fund that does not comply with international standards are two great handicaps that ought to be eliminated as quickly as possible.
“Over the medium term, it would also be desirable to raise the ceiling on tax-deductible pension contributions, since even the level planned for 2008 is still relatively low in an international comparison.”
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