The German public sector pensions row that serves as a warning to Britain

Yahoo

29-01-2025

When Otto von Bismarck created the world's first state pension in 1889, few could have predicted the effect it would have.
What started as a little security for Germans reaching 70 – who back then were unlikely to live long enough to significantly drain the public purse – was quickly adopted across the world.
But over a century later, the Iron Chancellor's altruism is now strangling Germany's economy – and fuelling resentment among those expected to pay for it.
Germany's annual budget now sits at around €480bn (£402bn), but approximately €120bn already flows out of the Exchequer and into state pensioners' pockets.
At the same time, the country is facing an ageing problem as a result of a dramatic fall in its birth rate during the 1960s and 1970s. There are now just three workers per pensioner, down from six in 1950 – and the writing is on the wall.
Marcel Thum, of economic researchers The ifo Institute, said: 'Without reforms, the costs of the pension system will rise very quickly in the years ahead. These costs have to be borne by the currently active population.
'If people live longer, we have to work longer or be satisfied with lower pensions. All other measures are just temporary fixes – many of them leading to even higher burdens later on.'
However, there's an even more controversial commitment that's also draining the nation's finances – public sector pensions.
The German government spends around €20bn a year on the final salary pensions of civil servants. Almost 600,000 are already in payment, with 200,000 more workers currently making their way towards retirement.
Germany is also a federal system, meaning its 16 states and its smaller municipalities are responsible for paying pensions to their own retirees.
They hand over another €49bn a year to over a million retired local government workers – prison officers, police, firefighters and teachers, among others. Almost two million more are steadily building up pension rights whilst in work.
In the UK, public sector pensions are paid by the Government. They provide a guaranteed income for life and cost around £54bn a year, although they are paid using the pension contributions coming in from current public sector workers and their employers.
With no money left to be invested to pay those workers when they retire, the UK has already built up a debt of £4.9 trillion in pension promises.
Back in Germany, however, some contributions are at least invested for the future. But that hasn't stopped pensions becoming a 'serious threat' at a federal level, according to the Council of Economic Experts, a think tank.
One of the group's experts, Martin Werding, said the unpopular system could not go on.
'In the 1970s and 1980s, the civil service increased a lot and these people are entering retirement. This creates a huge financial burden for the people who have to fund these.
'Typically, they're seen as unfair by people who aren't in the scheme. Most people are looking at civil servants with a lot of envy.
'Not implementing a major reform of public pension schemes, this is a serious threat at the federal level. We said 'this can't go on'. We have to discuss severe changes to our pension system due to demographic ageing. It's not sustainable.'
At the crux of their unpopularity is that they are completely taxpayer-funded. Workers do not make any contributions to the pensions that will one day support them for life.
The Council of Economic Experts, which was set up by law to advise on economics, is proposing closing the current scheme to new joiners. They would all be moved into Germany's national pension system, known as the GRV.
Workers' salaries would stay the same and like private sector workers, they would build up both a state and a 'company' pension. However, their benefits would be lower than what they currently receive and, crucially, they would have to contribute themselves.
Anyone who is 20 years or more from retiring would also be moved over, although the benefits they'd already built up would be protected.
A change on this scale would dramatically increase the €120bn cost of the GRV, so the Council of Economic Experts is also proposing that the contributions coming in from those moved over should temporarily be used to pay pensions to existing retirees. This would also ease the overall cost of the system.
Pressing home the case for reform, Mr Werding said that whilst many advanced countries would face this problem in 30 to 40 years, Germany had less than half that time to tackle it.
However, he added that any change would prove difficult.
He said: 'The problem in really taking this kind of reform is 16 levels of parliaments, and the Bundestag would have to approve this simultaneously. This is not very likely and is difficult to organise because the federal level has no specific lead in shaping the law for civil servants.
'I think this is a serious drawback, particularly for ambitions to go for the reform of the pension scheme.'
There will be some changes to the German pension system if, as expected, the Christian Democrats win next month's general election.
The party, known as the CDU/CSU, has pledged to allow retirees to work tax-free, set up pensions for children and rule out any pension cuts. It also won't interfere with existing legislation to increase the pension age to 67 by 2031.
However, it has made no commitment to tackle the age-old problem of balancing the books amid decades of generous pension promises.
And at a time where bold and radical action is needed the most, Otto von Bismarck is long gone.
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