Germany's pension system is rightly considered one of the most efficient in Europe. As "Expert" notes, the Germans themselves acknowledge it as such. Although this does not stop them from endlessly criticizing the injustice and imperfection of the redistribution principle that dominates the pension insurance system. The state concerned itself with supporting its citizens in old age as early as the late 19th century. Today, the German pension system resembles a pie, the layers of which are formed by all interested parties: the state, employers, financial institutions, and, of course, German citizens themselves.
Who will take care of the ordinary German
Pension provision (or insurance) in Germany is represented in three forms: state, corporate, and private. State insurance is mandatory for those whose monthly income before taxes does not exceed €3,900. At the same time, the contribution rate from monthly salary is quite high—19.5%—and is paid half by the employer and half by the employee. Pensions are paid depending on length of service and the professional pay scale. This part of the pension system is structured fairly traditionally: the working population finances current pensioners through contributions to the pension fund. It is based on the so-called solidarity contract between generations, or, in other words, the redistribution principle. In practice, this means that the money contributed is not accumulated but is immediately used for current payments. The condition for such a system to work is that contributions exceed payments by the amount of the "cyclical" reserve, which today amounts to one monthly payment.
In large German companies such as Mercedes, Airbus, or Siemens, an employee can also count on an additional corporate pension. Until recently, it was formed exclusively through voluntary contributions from employers. Companies either independently created a savings fund for their employees or entered into an agreement with a bank. The size of this pension depended on the employer's profit, the employee's length of service, and their position in the pay scale. For example, a highly qualified specialist could count on a corporate pension supplement of about €600 per month, while an ordinary worker could get €100–200. However, to receive a corporate pension, one must work for the company for a certain amount of time. Until quite recently, this period was at least 10 years.
In 2002, employees gained the opportunity to independently additionally finance their pension by contributing a percentage of their salary, vacation pay, or bonus. At the same time, the "loyalty" period was reduced to five years, and the minimum age at which an employee can change jobs while retaining the right to a pension was lowered from 35 to 30. Although corporate pensions remained strictly voluntary for employers, the procedure for indexing pensions, as well as payments in case of early dismissal or job change, is now clearly stipulated by law. Small and medium-sized companies were also allowed to create corporate pension systems. To stimulate this process, pension obligations to employees—in the event of company bankruptcy—will now be settled first.
A pension for the rich Buratino
Germans earning more than €3,900 per month can refuse the state's services and turn to private insurance, which, by the way, they actively do. Also entitled to this are persons not employed for hire, who therefore enjoy greater economic freedom, such as entrepreneurs, farmers, and people in creative professions. The popularity of private insurance in Germany is constantly growing, and all social groups, up to and including the unemployed, participate in it. The reason is that Germans trust banks and like being independent of government social programs (neither of which, unfortunately, we have today, not even a trace). The amount of contributions here is solely a matter for the payer themselves. The pension insurance contract is concluded directly with a bank. Payments can be made either from retirement age for life or over a period specified in the contract. Part of the payments can be bequeathed to family members. With private insurance, all monetary contributions are returned with interest, and the amount of contributions during one's working life under private insurance today provides a pensioner with a fairly comfortable existence.
There is also another way to privately save for a decent old age—life insurance. Its essence is that the employee (or employer) makes contributions over a certain period of time (at least 12 years), which, upon expiration of the insurance policy, are paid to the insured person along with interest, and after death the insurance sum can be received by heirs. In some cases, this insurance is mandatory for the employer, but overall it is considered an excellent way to incentivize an employee. Such insurance can also be obtained as a lump sum upon retirement. However, if the insurance is bequeathed to someone, the amount of regular payments will be less than under a non-bequeathed policy. Therefore, many Germans today take out two policies: private pension insurance and classic life insurance. The latter is especially important if the insured is the family's sole breadwinner.
Germany also has one type of insurance that is unusual for us—the so-called fund-based insurance. The funds contributed by the policyholder are invested in funds or stocks to maximize profits.
Too good is also bad
However, the too-high standard of living of Germans played a cruel joke on Germany's well-established pension system - it began to frankly malfunction. Today, the average life expectancy for men has risen to 75 years, and for women even to 80. Currently, a quarter of Germany's population, about 19.5 million people, are pensioners. And if today there are 44 pensioners per hundred working citizens, by 2030 their number will increase to 71. The decline in the birth rate also adds problems. In addition, the overall length of an employee's working career is objectively shrinking. Production processes are becoming more complex, which requires a longer period of professional training. And finally, high unemployment in the country contributes to the pension system crisis, since only working people make contributions to the state pension fund. As a result, in Germany pension payments increase every year, while contributions decrease. Already today, in order to keep the state pension at its previous level, the government subsidizes the state pension fund. And that amounts to tens of billions of euros per year.
According to a report published in 2004 by the Association of German Pension Insurance Funds, the state pension of Eastern Germans turned out to be higher than that of Western Germans. For the latter, this was an unpleasant discovery that prompted them to reconsider their forms of pension insurance, especially since there is a choice. An Eastern male pensioner receives on average €1,031 from the state, while a female pensioner receives €655. Westerners receive €978 and €479, respectively. Only 7% of women in East Germany at that time received a mini-pension of about €300, while in West Germany their number was five times greater - 37%. Reasons? In the former GDR, unlike the FRG, the percentage of unemployed was significantly lower, and the overall length of service was longer.
Time does not wait
So far, Germany, albeit with difficulty, is coping with providing for its pensioners. However, the responsible Germans decided not to wait with reform. Gerhard Schröder's government had already set in motion the flywheel of yet another reform, designed for 30 years. The Germans intend, along with preserving state pension provision, to increase the role of people's own care for their future old age.
In 2001, the then Minister of Labor and Social Affairs of the FRG, Walter Riester, introduced a system of private funded insurance supported by the state. The Riester reform is designed for those who receive pensions only under the compulsory state insurance program; essentially, this is the majority of the economically active part of the country. It is for them that the inevitable reduction in pension size by 2011 will be most painful. This is a voluntary type of insurance, the incentive for participation in which is the creation of a personal savings account. A citizen participating in the Riester system has the right to deposit from 1 to 4% of his annual income into it. For every 100 units of the participant's voluntary contribution, the state adds its own 15 units. The size of the state portion of the "Riester pension" depends on marital status, number of children, income level, and contribution size. In this way, the state encourages childbirth. For each child, a participant in the system is entitled to an additional premium of €46-85 per year. Upon retirement, the participant does not have the right to receive the entire accumulated amount at once, but is instead guaranteed a lifelong pension.
Perhaps, in the course of the reform, the state will have to take such an unpopular measure as increasing the retirement age from 65 to 67. It is very likely that it will also be necessary to increase the amount of mandatory contributions to the pension fund from the current 19.5% to 22% of employees' salaries. And at the same time, it is not at all guaranteed that the state will be able to completely abandon subsidies to its pension funds, and that pensioners will maintain the current ratio of pensions to their labor income.
We Can Manage
However, already today the pension of almost any pensioner in Germany has different sources of income, most of which are the result of the prudence and foresight of the person himself (see "Examples from Life"). Every German, as a rule, throughout his entire working life uses every opportunity to contribute to his future pension or the pension of his less affluent partner, using various insurance and savings options, the reliability of which is maximally ensured by the German financial system. In addition, it is not uncommon for a pensioner's wallet to be topped up by income from renting out real estate, as well as from running a family or individual business. Although total income is certainly lower than a salary, pensioners usually no longer have obligations to repay loans, which typically accompany most working people, nor expenses for supporting children. Instead, they have free time and the opportunity to travel. And that is what most European pensioners happily do. And whoever is not able to take care of their own material security in old age in advance - as the Germans say, "selber schuld" (their own fault).