Saturday, November 5, 2016

Screw the poor: German workers face automatic tie of retirement age to life expectancy

The blogster is fascinated by the German debates on social security and pensions. It shows in many posts, for example Germany's social security retirement system: 50% or recipients under poverty level by 2030?

Successive governments have chipped away at "entitlements", and politicians are talking about more "reforms", preferably soon enough to avoid the 2017 national elections being dominated exclusively by the subject.

The newest proposal coming out of the Cristian Social Union (CSU, the Bavarian counterpart to the CDU) is a fairly straightforward one.

Tie retirement age to life expectancy.

The logic is simple: when social security was introduced, life expectancy was lower, hence people received pensions for a shorter time, keeping payroll deductions at a low enough level. Life expectancy has been going up, the population is projected to shrink, so let's up the retirement age.

The law already makes these adjustments until 2030, with the social security retirement age slowly going up to 67 years and benefits falling further to about 43% (from 46% today).

The new proposal goes beyond this and calls for automatic adjustment, something like an increase of six months for every year of increase in life expectancy.

Average life expectancy is, indeed, going up. From about 65 years in 1950 to around 80 in 2015, projected to further increase to 85/89 in 2060.

The biggest problem with this is that workers in physically and mentally demanding jobs will suffer twofold.

They will have to work longer to accumulate the "points" needed for full benefits, damaging their health further. Alternatively, they can retire early with a smaller pension for the remainder of their life.

But automatic adjustment is more insidious than that and has to do with the difference in life expectancy of the poor and the wealthy.

Right now, males in economically depressed regions live on average 73 years, those in better off regions just over 81.

Based on the projected 2060 figures and assuming the current differences will not narrow down substantially, it is conceivable that full retirement age under an auto-adjustment formula as tight as the proposed 6 months for each year will catch up or surpass average life expectancy in poorer regions.

Should the life expectancy of lower wage workers decrease, as it has done in the U.S., Germany's poorer workers would be even worse off.

Exact figures won't be available for a couple of decades or more, but there is little prospect of the overall pictures changing to the benefit of the poor and of low wage workers.

Life expectancy of wealthy people has increased more than that of the poor - this effect alone will make it harder for the poor to achieve full social security benefits.

The 15-year study out of the U.S. says that life expectancy for the richest 5% increased by 2.34 years, and 0.32 years (a few months) for the poorest 5%.
Obviously, a raise of 6 months for every 12 of increased average life expectancy does not look good for the poor.

You could argue: This would merely be the way the system behaved for many decades after it was first introduced.

Given that Germany as a whole (in terms of real GDP) is so much wealthier that in the late 1900s, this would translate as follows: workers have not benefited much from the accumulation of wealth.

Given that workers paid only a small percentage of their wages into social security at that time but 18,7 % (worker share) now and over 20.4% in 2025, the relative benefits (in terms of ROI) are lower today.

What retirement benefits level have successive German governments considered a reasonable floor for government workers?

Today, career civil servants with high school plus vocational training skills receive about 1600 Euros a month without ever having had contributions deducted from their pay.

The average for a male worker in the private sector who retired in 2012: 898 Euros.

There is no statutory minimum. There is, however, a statutory maximum for social benefits of currently about 800 Euros a months.

[Update 11/10/2016] In a surprise move, both major parties (CDU and SPD) announced that there will not be a major overhaul of the German social security retirement system before the 2017 federal elections.

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