Pension Reform in Germany

Pension Reform in Germany had been adopted in 2001. Through this reform a new personal pension account had been introduced and the amount of the public pensions were reduced. The pension reform program had been implemented through several phases. These are discussed below.

State Pension reform:

The first reform measure was the long term stabilization of the rate of contribution to the Public Pension Scheme. The aim of the government was to keep the amount of contribution to finance the state pensions under 20% of the payroll till 2020 and 30% till 2030. Therefore the future plans for pension expenditure growth was revised with few changes in the indexation formula which links pension with earnings development. State pensions were indexed to the wage growth in Germany.

Modified Indexation Formula: The indexation formula before 2000 is given below:

P(t) = {TI(t-1) / TI(t-2)} * {TP(t-2) / TP(t-1)} * P(t-1).

Where P(t) = Gross pension in the time period t,
TI = Level of the net income per worker in the time period t, related with total income,
P(t) = The net pension level within the time period t, relative to the average total pension per retiree.

But this formula had been changed in 2001. The new formula was:

P(t) = {GI(t-1)/GI(t-2)} * [1- {k(t-1)^s} – {k(t-2)^p}] / [1- {k(t-2)^s} - {k(t-2)^p}] * P(t-1).

Where GI(t) = Gross incomes per worker in the period t,
k(t)^s = subsidized private savings contribution rate in the time period t
k(t)^p = rate of contribution to the Public Pension Scheme in the time period t.

This new indexation formula moderated the pension growth.

Personal Pension Plans:

Through this plan the conditions for personal pension accounts were changed. Government had started to give incentives for voluntary savings. In 2002, under the new pension plans, workers, could save one percent of their total income into the authorized private insurances or occupational pension plans, and within 2008 the savings will be allowed upto 4%.

Conclusions:

Through the pension reform program, which mixed up the reductions of state pension scheme with the subsidized voluntary savings, the personal pension funds had been built. The German policymakers agreed that it was a very positive move for pension financing after the 1950s.