Is Germany Doing Pensions Right?


Germany often encourages much jealous muttering. The country found an easier path than most through the global financial crisis and it is now even touted as the world’s best nation (at least according to one survey). Besides stellar engineering and economic efficiency, the German model also stands for social equity. This “social market economy”, however, is increasingly put into question by the looming spectre of old age poverty.

On the surface, all is well. Unlike many of its peers, the German pension system is in comparatively sound financial shape. Even though the number of working people per retiree is predicted to halve in the next 40 years, the share of GDP spent on pensions will increase by less than 2%. The current influx of refugees should, moreover, slow down the shrinking of the workforce.

It is the design of the so-called Bismarckian pension system that makes widespread pensioner poverty an imminent threat. Instead of funded pension schemes – common in the US or the UK – where pension payments are pooled in large pension funds, the German government merely keeps a virtual tab (on a pay-as-you-go basis). Other state-run pension systems, for example in Nordic countries, distribute by means of a more generous base pension; the German system is still geared toward status maintenance for high earners.

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