Demographic shifts transforming fiscal stabilizer into political adversary

Germany's Chancellor, Friedrich Merz, has announced the formation of a commission to prepare the country's next pension reform. Known as the "Herbst der Reformen" (Autumn of Reforms) expert group or commission, this body aims to propose changes that could help secure the future of the nation's pension system.

The commission, comprised of experts, is considering several reform options. These include linking pension increases to inflation, adjusting the standard pension definition, reintroducing the sustainability factor, and strengthening private retirement provisions.

The sustainability factor, which has been suspended since 2018, plays a crucial role in the pension system's financial health. Currently, the system, known as the "Haltelinie," is mainly financed by employed persons.

The pension system has seen significant changes over the years. In the 1970s, it was seen as a fiscal funnel, with the number of contributors growing, wages and tax revenues increasing, and the retirement age being reduced. In 1992, the retirement age was raised to 65 years, early retirement penalties were introduced, and the pension was linked to the increase in net wages.

In 2002, the Riester pension for private old-age provision was introduced, improvements were made to occupational old-age provision, and later, the Rürup pension was added on top. In 2007, the retirement age was decided to gradually increase to 67 years.

However, the pension system faces challenges. The already accumulated implicit state debt through future pension obligations is estimated to be 19.5 billion euros, which corresponds to around 454% of gross domestic product (GDP). Economists estimate that social contributions could rise to around 50% of gross wages in the future.

Financial economist Bernd Raffelhuschen claims that high social contributions put pressure on tax revenues today and could "cost the state around 6% of the tax base."

The commission's reform options also include pension adjustments based on inflation instead of wages, later retirement, larger deductions for early retirement, and a stop to the retirement at 63.

It's important to note that the commission is only supposed to present reform options in 2027. In the meantime, the pension system continues to operate under the pay-as-you-go system, which is under pressure due to demographics, with fewer contributors paying for more pensioners who also live longer.

Euphemisms such as the Haltelinie, Muetterrente, and Rente mit 63 are intended to support pension level, generously credit child-rearing years, and allow early retirement, but the state did not have to properly disclose its payment obligations when implementing these benefits or include them in the budget.

The commission's work is a significant step towards securing Germany's pension system for future generations. The proposals it presents will undoubtedly shape the future of retirement in Germany.