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Mannheim Research Institute for the Economics of Aging www.mea.uni-mannheim.de
Pension Reform in Germany: Introducing a multi-pillar system
to cope with demographic change
Dr. Anette Reil-Held
Seminar on Pension Reform
Instituto de Empresa, Madrid, July 19th, 2010
2
The motivation for a multipillar system
1950 2001 2050
Source: 11th Population Projection by the Federal Statistical Office
Problem 1: Babyboom and Babybust
„Problem 2:“ Increase of life-expectancy
Solution 2:
Increase retirement
age
Many
Few
Solution 1:
Partial Funding
3
The Riester-Reform 2001: a Paradigm Shift towards a Multipillar System
Three aims:
1. Sustainable contribution rates (below 20% until 2020, below 22% until 2030)
2. Secure long-term stability of pension levels: net replacement rate must stay above 67 %
3. Spread of supplementary private pension savings to compensate the lower pension level (individual and occupational pension plans)
New Pension formula
Retirement Saving Incentives
Minimum Pension (means tested)
Instruments
The Reform Package on the whole
„Sustainability Commission“ in 2003
New set of assumptions about future demographic and economic development revealed that Riester Goals cannot be met.
Paradigm shift: think in financial possibilities.
Two main reform elements Introduce sustainability factor in pension formula
(Gross Pension Level will further decline from 48% in 2000 to 41% in 2040)
Increase retirement age from 65 to 67
55
The Framework of the „Riester-Pension“
Goal: Build up supplementary, voluntary, funded old-age provision assuring an overall level of provision of 70 % (like pre-reform)
Subsidies in form of flat-rate benefits and tax relief (deferred taxation principle)
In general, everyone is eligible who is affected by the reduction in public pension benefits (employees, wage compensation beneficiaries, and also spouses)
Pension plans need to be “certified”, criteria are e.g: Regular saving payments Provider must guarantee a strictly positive rate of return Pension benefits must be disbursed as certain forms of lifelong
annuities Administrative and marketing costs must be spread over initially
10, now 5 years
6
From ... on
Savings rate
Basic subsidy
Euro/year
Child subsidy
Euro/year
Tax deductible maximum
2002 1 % 38 46 525 2004 2 % 76 92 1,050 2006 3 % 114 138 1,575 2008 4 % 154 185 2,100
Saving incentives of Riester-pensions
/300
Sponsoring by income and family status
Gross income per yearSingle
Married, single earner, no child Married, single earner, two children
Single, one child
State Spon-soring in % of savings
Source: Gasche (2008)
Does it work? Development of Riester Pensions
1.4
13.6
5.6
10.8
Riester Pensions in Mio.
Insurance plans
Bank saving plans
Investment fund plans
Building loan contract
2001 1/2010
8
Simplification of the regulation, e.g.
Introduction of a permanent subsidy appliance procedure
30% of accumulated capital can be paid as one-off payment
Stronger sales incentives: aquisition costs have to be spread over 5 instead of 10 years
Introduction of a new tax-favoured product „Basic pension“ or „Rürup Pension“ which aims at high earners and self-employed
Tax advantage for whole life-insurance was abolished
Introduction of gender neutral tariffs for Riester Pensions
„Take-off“ after Amendment (mostly the „Old-Age Retirement Income Act“ in 2005)
99
Does it work? Riester Pensions by number of children
Source: Coppola and Reil-Held (2010)
4.88.5
12.8
17.9
22.226.0
8.1
12.3
19.1
25.8
36.332.6
11.9
21.6
29.6
40.4
45.3
49.2
15.0
23.3
38.2
58.159.9
56.9
010
%20
%30
%40
%50
%60
%70
%A
ntei
l der
Hau
shal
te
Kein Kind 1 Kind 2 Kinder 3+ Kinder
SAVE 2003 SAVE 2005 SAVE 2006SAVE 2007 SAVE 2008 SAVE 2009
No child 1 child 2 children 3+ children
1010
Does it work? Riester Pensions by income
Source: Coppola and Reil-Held (2010)
3.65.0
8.910.7
14.516.2
7.69.4
20.1
23.5
27.9
32.7
8.6
17.6
23.6
30.5
39.6
36.6
7.9
15.8
21.3
33.3
38.8
43.1
11.4
19.522.1
35.2
41.041.3
05%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Ant
eil d
er H
aush
alte
Quintil 1 Quintil 2 Quintil 3 Quintil 4 Quintil 5
SAVE 2003 SAVE 2005 SAVE 2006SAVE 2007 SAVE 2008 SAVE 2009
1. Quintile 2. Quintile 3. Quintile 4. Quintile 5. Quintile
... of the disposable household income distribution
Alternative Approach: Income structure of
flat-rate benefits recipients
Yearly Income (in Euro)
Share in % (2008)
Up to 10,000 31,5
10,000 – 20,000 20,2
20,000 – 30,000 18,8
30,000 – 40,000 13,8
40,000 – 50,000 7,1
More than 50,000 8,6
Source: Rieckhoff and Stolz (2009)
12
2010
2020
2030
Does it work?Will the Riester Pension close the gap?
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
Rentenzugangsjahr
Pro
zent
des
Dur
chsc
hnitt
sein
kom
men
s
Rentenlücke "Riester-Rente"
Source: Börsch-Supan and Gasche (2010)
Year of entry into retirement
Pension gap
Riester pension%
of
avg.
I ncome
13
Conclusion
Riester Pensions „took off“ after the complexity of the regulation was reduced.
Nowadays about one third of all eligible persons has got a Riester Pension Plan. Good or bad? What is a realistic target?
Riester Pensions are very popular among parents.
Lower income groups are harder to reach.
4% of gross income as retirement savings are (still) just enough to compensate for the reduction in the public pension level.
The higher retirement age contributes significantly to close the gap.
Promotion of occupational pensions with Riester-Reform
Right to convert part of the salary into contributions to pension plans, either Gross pay: tax deductible and exempt from social
security contributions (up to 4% of upper earnings threshold)
Net pay: Riester incentives apply
New investment vehicle: Pension funds
Succesful: coverage increases from 35 to 46% of private sector employees