"Proposing an increase in the retirement age is unpopular"
Hardly any other political topic is treated so gingerly as pensions. And it is no wonder: making any changes to current public pension arrangements, which represents the largest cost item in the federal budget, could lose votes. Professor Axel Börsch-Supan, Director at the Max Planck Institute for Social Law and Social Policy in Munich, is calling for a rethink. He suggests linking the retirement age to life expectancy to keep the financial burden on the younger generation manageable.
Professor Börsch-Supan, what do you think of people who wish to take early retirement at the age of 55 or 60?
There’s nothing wrong with that in principle, provided that these people have earned enough to be able to afford to do so. People who retire at the age of 50 should have sufficient means to cover them for an average of 30 years. Provided he or she has saved a sufficient amount, there is no reason not to do so. However, I vehemently oppose early pension payments being made at the expense of others, especially the younger generation. That isn’t fair and young people cannot be expected to bear the burden.
Some people long for retirement, others are apprehensive about it because they don't know what they’ll do when they retire.
People are very different in that respect. Our data show that depression and divorce rates increase following retirement. Many people find it a challenge to fill their days with new meaning – this can affect anyone from CEOs and Directors to tradesmen and cashiers. The surveys we have carried out have repeatedly shown that prior to retirement, people say they want to stop work two or three years earlier, but when we question them again after they’ve retired, many of them say they wish they had kept working for another two or three years. I suppose one has to experience the reality of retirement to understand it.
Many people also fear falling into old age poverty: how secure is the state pension?
Pretty secure in my opinion. I don't mean to say that everything will continue as before, but I’m convinced that the state pension will continue to provide people with a reasonable standard of living in the future. Our children will actually enjoy greater purchasing power than we do because the productivity of our economy is increasing faster than demographic change is reducing our capacity to fund pensions. Rather than pension cuts we’ll see pension increases, albeit not on such a generous scale as in previous years.
Politicians are promising that the so-called pension level will remain at at least 48 percent beyond 2025: how credible is that?
We should probably first clarify the rather misleading term "pension level", because it does not refer to a "level” but to a percentage; namely to the value of a person’s pension who has paid his or her national insurance contributions for 45 years expressed as a percentage in relation to the average wage of a German employee. Pensions increase whenever wages do, but not to the same extent. Hence, while the pension level may fall, the purchasing power of pensions can still increase. It is financially unsound and also not very smart when politicians suggest that we can raise the pension level. It is simply impossible to increase pension payments with the same dynamics as in recent years when there are fewer people paying into the pension fund but more pensioners as a result of demographic change.
What do you think of proposals by politicians to service existing statutory pension payment commitments by providing capital cover?
Existing claims cannot be financed in this way, as the necessary capital has to be accrued first. It takes about 40 years of pension contributions to serve 20 years of pension payments. Currently, this burden would primarily affect the younger and middle generations, who are already having to service the existing pension claims of the elderly. Imposing this double burden would be wrong.
What do you propose?
We should wait with funding public pensions until my own generation, the baby boomers, no longer put such a strain on the state pensions as they currently do. What we need now is to spread the burden over as many shoulders as possible. This should be done through a mix of many small steps such as smaller pension increases, increasing contributions and tax subsidies by a moderate amount, slightly increasing the retirement age, and strengthening occupational and private pension schemes. Of course, increasing the employment level would also help, although the rate of employment in Germany is already high. The share of women in gainful employment is now higher in Germany than in France in most age ranges. More migrants could also take up well-paid jobs if they have the appropriate qualification.
None of this sounds like a sustainable solution.
That’s right, which is why we should finally be asking ourselves where the greatest employment reserve is to be found that we have thus far not fully tapped in. These are people aged 62 and over. Unfortunately, we introduced the very unwise "pension at 63” policy which squanders a huge amount of potential employment. Not all, but most people at that age are still in good health and have a lot of expertise that they could pass on to younger people. It would already help if they were to work part time.
So the retirement age should be raised again?
You can’t make such a sweeping statement. The mistake we’re making as a society is imposing a universal retirement age, which I think is nonsense. Do you know when 65 was introduced as the statutory retirement age? Over a hundred years ago. We now live much longer and remain in good health for longer. I recommend linking the retirement age to our life expectancy. That’s not a revolution, but a necessity.
We could hardly reverse the policy of "retirement at 63".
That’s a matter for the politicians. One has to want it. But all parties are loath to take this step. Proposing an increase in the retirement age is unpopular and that costs votes. I find the short-sightedness, faint-heartedness and non statesmanlike thinking in politics shameful. It’s the same for climate change as for demographic change: both will cost money, so hardly any politicians really dare to do anything about it. The fear of losing votes is embarrassingly great.
Do you still want to draw your pension?
I already receive my state pension. However, the Max-Planck-Gesellschaft kindly allowed me to continue on as Director for a few more years and then to continue my work in an emeritus research group. I’m really happy about this. There are still many aspects of our social system to be studied. I am interested in the development of our economy as the aging process unfolds. Whether we’re talking about the future of pensions, long-term care or welfare, a lot will depend on how we can successfully boost our productivity.
Questions posed by Martin Roos.