More on German Privatization of Social Security

John K. Taber jktaber at dhc.net
Wed Sep 27 18:42:16 PDT 2000


This is from the Financial Times. You have to poke around a little to find it at http://www.ft.com/

Note that in the second article, the German investment industry is very unhappy with a provision in the privatization proposals that any investment to be qualified must guarantee at least as much money in retirement as is put in by the worker, and must pay life-long benefits. Very unhappy about that, I shouldn't wonder.

-- John K. Taber

Boost for German pension reform By Ralph Atkins in Berlin Published: September 5 2000 20:43GMT Last Updated: September 6 2000 12:10GMT

The biggest reform of Germany's state pension system since the 1950s moved significantly closer on Tuesday. The main opposition parties signalled they would not block plans by Gerhard Schröder, the chancellor, to supplement the creaking pay-as-you-go system with private pensions.

That appeared to clear the way for Mr Schröder to pull off a second major structural reform project this year, following the successful passage through parliament of corporate and income tax cuts earlier this summer.

"Germany's Reformstau [reform logjam] is becoming shorter," said Dieter Brauninger, economist at Deutsche Bank in Frankfurt.

The plans to give private and occupational pensions a boost - including through tax breaks and subsidies worth eventually DM19.5bn ($8.8bn) a year - would also encourage Germany's fast-changing financial markets, though analysts said the flow into investment funds would be modest in comparison with other countries.

In addition, Dieter Hundt, president of the German employers association, warned that the reform plans remained "insufficient" to cap pension contributions - which have driven up Germany's non-wage labour costs - at acceptable levels.

But if approved by parliament the proposals - scheduled to be set out in detail in two weeks - would mark a significant change for Germany, where the state pension system is a cornerstone of the welfare state.

Together with the tax changes, Mr Schröder would have secured fundamental structural reforms that eluded his predecessor, Helmut Kohl, in 16 years as chancellor. Mr Schröder has sought a political consensus behind his pension reforms partly because he depends on opposition support in the Bundesrat, the second parliamentary chamber representing the federal states, but also because of the danger of a backlash from trade unions and the left wing of his Social Democratic party.

Late on Monday, Mr Schröder won cautious support from trade unions by agreeing to restore the link between state pension levels and average net wages, broken as part of budget consolidation measures, from 2001, a year earlier than envisaged.

He has also accepted demands from the opposition Christian Democratic and Christian Social Union (CDU/CSU), which have aligned themselves on many points with the trade unions, for extra help for families with children making private provision for retirement. Horst Seehofer, CDU/CSU pensions spokesman, said it appeared that "step by step the government is fulfilling our demands".

Although the parties' stance would not be decided until the legislation was published, the proposals had moved clearly towards their goals. Berlin has also made concessions to the banking sector by broadening the definition of investments to be authorised under the legislation to include not just insurance-style policies.

That has boosted hopes of Germany eventually developing a UK or US-style pensions industry.

============================================================= And this also from the Financial Times ...

German reform 'to boost pensions' By Ralph Atkins in Berlin Published: September 26 2000 17:32GMT Last Updated: September 27 2000 07:06GMT

Walter Riester, Germany's labour minister, predicted the "very fast" development of private pensions as he unveiled the country's biggest reform of old-age provision since the 1950s.

His draft pensions bill, which for the first time would supplement the creaking pay-as-you-go state pension system with private alternatives, would boost further Germany's fast-evolving corporate culture, Mr Riester suggested.

"People will very quickly see what opportunities have been opened up," he said.

The legislation would mark a turning point for a welfare state dating back to the days of the 19th century and Chancellor Bismarck.

It envisages younger workers - encouraged by tax breaks and subsidies eventually worth DM20bn (E10.3bn, $9.1bn) a year - investing 0.5 per cent of gross wages in authorised private insurance or pension funds from next year, rising to 4 per cent in 2008. That would be in addition to contributions to the state system, currently 19.3 per cent of gross wages split equally between employers and employees.

The dramatic ageing of the population threatens exploding costs for the state system. But the government hopes to keep contributions to the state scheme - which have driven up Germany's non-wage labour costs - below 22 per cent of gross wages until at least 2030. Instead, state pensions would be cut back.

Private provision would be voluntary but Berlin officials assume about 90 per cent of the 35m people currently paying into the state system would eventually set up additional private provision.

However, the draft bill received a critical response from financial analysts in Frankfurt. Finance houses are unhappy at the restrictions imposed on the types of private or occupational pension schemes qualifying for state help: they must pay a life-long pension and guarantee to pay out at least as much as is paid in.

Peter Koenig at Morgan Stanley Dean Witter in Frankfurt, said that the reform amounted to "a government-regulated substitution of a small part of the pay-as-you-go system with a very limited range of funded products". Banks were also disappointment the government has abandoned plans for an early move to a system of "deferred taxation" - by which pensions are taxed but not contributions.

Meanwhile, the German employers association (BDA) complained that even capping state contributions at 22 per cent was "unacceptable" - and the government's projections were anyway over-optimistic. It regretted Mr Riester had no plans to raise the state pension age.

Mr Riester faces a series of political battles to push the legislation through parliament, particularly in the Bundesrat, or second chamber representing the federal states, where the centre-left government has no majority.

Trade unions are planning protests next month over the reductions in state pension levels and the piling of additional costs on employees, rather than employers.

However, the labour minister has a good chance of winning at least the tacit backing of the opposition Christian Democratic Union, which has indicated a willingness to strike a deal.

Fresh negotiations with the CDU are expected this week. The reform was more likely to succeed when, "it is accepted on the widest possible basis", Mr Riester said.

-- John K. Taber



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