After 125 years: how fair is the pension insurance still?

Lenders

Today Deutsche Rentenversicherung is celebrating its 125th birthday. The future of public old-age insurance by no means looks bright. Although the government has increased the pension benefits for different groups of people with the current pension package, experts agree that pension insurance faces enormous financial problems in the medium and long term.

125 years ago, the German pension insurance was launched. Thus, in the year 1889 after the establishment of the legal health insurance (1883) and the accident insurance (1884) the third large social security was created in Germany. Originally founded only as a pension for workers, it soon supported employees, craftsmen and farmers. Although the pension insurance initially only a meager extra income for the then often destitute pensioners represented, it has developed over the years to one of the most important pillar in the social welfare system of Germany. More than 20 million retirees currently receive benefits under the statutory pension insurance scheme – over 50 million people are covered by statutory health insurance .

Thus, the pension insurance has changed in 125 years

There have been a number of developments and changes in pension insurance over time. For example, at the beginning there was a standard retirement age of 70 years . Since this year, long-term insured persons can, under certain conditions, even go into old-age pension at the age of 63 without deductions . The amount of contributions has also changed. With the introduction of pension insurance in 1891, the contribution rate was 1.7 percent. This rose steadily, especially with the introduction of dynamic pensions with the pension reform of 1957. Today, the contribution rate is 18.9 percent (half of which is borne by the employee and the employer). In 2015, the contribution rate is expected to be 18.7 percent.

Pension insurance: Financial problems threaten after 125 years

As part of the pension reform in 1957, the current pay-as-you-go financing was implemented. This form of financing, based on the so-called intergenerational contract, does not create any reserves with insured persons’ contributions. Rather, the contributions are used to pay the pensions for the current beneficiaries. This means: Employees who pay contributions into the pension insurance, thus pay the pensions of their own parent or grandparent generation. In return, they thereby secure the right to pension benefits if they themselves have reached retirement age. Exactly for this reason , however, now the financial problems of the German pension insurance .

How generational is the pension insurance?

While the intergenerational contract and pay-as-you-go funding have worked for decades, the 125th anniversary of the pension insurance is already marked by significant problems for the future. Because the demographic structure in Germany is changing . For one thing, people are getting older on average. They therefore receive longer pension benefits. On the other hand, Germany has a very low birth rate. So there are fewer employees who have to finance the pension for more and more people.

Although the pension insurance has been able to build up reserves in recent years by a positive wage development. Permanently, however, it will have higher expenses than revenue. The result: increasing contributions for the pension insured and declining benefits for the coming generations of pensioners. It is therefore very likely that today’s young workers will have to live on less money in old age than the previous generations.

Service: Anyone who, despite the problems of the German pension insurance would like to secure a retirement without financial worries, this can with a private pension. Request a free quote.

Problems of pension insurance are well known

The “father of the pay-as-you-go system”, Wilfrid Schreiber, foresaw the demographic problems of the pay-as-you-go system already during conception in the early 1950s. Therefore, he did not only encourage a so-called child pension, which became superfluous with the introduction of the child allowance. He also demanded a double contribution rate for childless pension insured . However, this part of his concept was not implemented – despite the concerns of the then Minister of Economic Affairs and later Federal Chancellor Ludwig Erhard.

Experts call for government to change pension insurance now

Critics of the pension package from this year accuse the government, despite the financial problems, to distribute pension gifts especially to the current generation of pensioners , instead of investing in the future. In fact, the Deutsche Rentenversicherung faces ever new challenges after 125 years. CDU Member of Parliament Jens Spahn, who intervenes inter alia for the establishment of intergenerational justice in the Basic Law, calls on the occasion of the anniversary to the press agency dpa a realignment of the statutory pension with more consideration for the young and future generations.