Thanks to its solid financial position, the German Pension Insurance has the necessary funding to continue to perform its function. However, the premature end of the German Bundestag’s (the Parliament of the Federal Republic of Germany) legislative period meant that a number of important legislative initiatives that had already been set in motion were not passed.
Pension Package II
The coalition government’s most important pension reform project was the “Pension Level Stabilisation and Generation Capital Act”, also known as Pension Package II. This legislation was intended to facilitate the long-term stabilisation of the statutory pension benefit level at 48 per cent of the average wage. It would have enabled pension recipients to fully participate in future wage developments, while shifting the demographic burden away from them. Financing the pension package would have entailed a significant increase in contribution rates.
The legislators planned to limit the extent of the contribution rate increase by setting up a “Generation Capital Fund”: a capital stock financed through loans from the federal budget. The return on investment was expected to be significantly higher than the cost of financing and the net income was to have been successively transferred to the pension insurance scheme, thereby relieving the burden on contributors and the state. The self-government body of the German Pension Insurance had already made the key demand that pension contributions should not be used to build the capital stock.
Increase in the sustainability reserve
One key element of Pensions Package II was an increase in the minimum sustainability reserve threshold from 20 to 30 per cent of monthly expenditure. The sustainability reserve enables the German Pension Insurance to compensate mid-year fluctuations in revenue and expenditure. The German Pension Insurance’s self-government body had long been lobbying for a higher minimum reserve threshold. A higher minimum reserve would help to mitigate the risk of mid-year liquidity bottlenecks.
“The self-employed tend to be affected to a greater extent by poverty in old age, which is why a compulsory insurance arrangement for the self-employed is absolutely essential.”
President of Deutsche Rentenversicherung Bund
Mandatory old-age provision for the self-employed – Pension Package III
Another legislative initiative not implemented during the legislative period was the introduction of mandatory old-age provisions for the self-employed. Many self-employed people, especially persons who do not employ any staff (solo self-employed) are at a much higher risk of falling below the poverty threshold in old age. This led to the idea of introducing mandatory old-age provisions to pension schemes for self-employed persons with no previous compulsory insurance history. The intention was to give self-employed people the freedom to choose between statutory pension insurance and private pension products.
However, a problematic aspect of this opt-out arrangement is the associated burden of administrative work. Another questionable issue is whether many (solo) self-employed people will be able to reliably build up a pension due to frequent status changes. It was also not clear whether the opt-out arrangement would extend to all risks that are covered by the statutory pension insurance scheme. This could result in the self-employed selecting their own risks, which could be problematic for the statutory pension insurance scheme.
