Dismantling an Earnings-Related Social Pension Scheme: Germany's New Pension Policy

Abstract

A paradigm shift in pension policy decided by the German red–green coalition government will considerably affect the level and structure of pension benefits as well as the mix of public and private old-age security arrangements. The article starts with a brief outline of the pension schemes as they had been designed before the recent decisions, and with a few remarks on the reasons for current reform debates. The major measures of the 2001 Pension Reform are then described. The focus of the article is on the effects of the reform for (personal) income distribution and institutional design. A partial shift from (mandatory) public (pay-as-you-go financed) pensions to (voluntary) private (capital-funded) pensions and from defined benefit towards defined contribution will, among other things, reduce the benefit level in the social pension insurance. A large number of contributors – even after many years of paying contributions – will only receive benefits below the social assistance level. It can be expected that this development will transform the present earnings-related statutory pension scheme – which has a strong contribution–benefit link and is aimed at income smoothing over the lifecycle – into a basic, highly redistributive pension scheme, aimed mainly at avoiding poverty. Income inequality in old age is expected to increase as a result of the new strategy in pension policy.