In Spite of Thrifty Image, Germany Races to Raise Pensions – Wall Street Journal

 In World

BERLIN—There is a ticking demographic time bomb in fast-aging Germany that threatens the country’s generous welfare system.

Politicians’ reaction: Spend more money on pensioners.

At a meeting on Thursday night, Chancellor Angela Merkel’s government agreed to spend nearly €4 billion ($4.2 billion) more on pensions annually in a bid to bolster the incomes of people in eastern Germany and those unable to work.

And this is just the beginning. With next year’s general election approaching, parties are jostling to grab votes from the bulging cohort of current and soon-to-be pensioners with promises economists warn could put a huge burden on Europe’s largest economy.

These range from guaranteeing a minimum pension for some workers to raising pensions for everyone and injecting more taxpayer money into the system, all of which would add tens of billions of euros to its vast financing needs.

The unfolding bonanza belies the country’s reputation for fiscal rectitude, forged over a decade spent admonishing its neighbors to cut spending and reduce public debts.

It is also risky. Many mature countries face a fiscal crunch as baby boomers head into retirement. This is a particular problem for those like Germany that rely on pay-as-you-go systems, where workers support pensioners directly. As the ratio of workers to pensioners shifts, the levies on wages rise, making labor expensive and less competitive.

And Germany is heading for the crunch faster than most because its society began aging earlier. While a series of overhauls a decade ago has bought it time, economists warn today’s promises are threatening this achievement.

“They make election gifts to pensioners and leave the future generations to settle the bill,” said Friedrich Breyer, professor for economic and social policy at Konstanz University.

The government and opposition parties aren’t contesting the increased financial burden any improvement in the lot of pensioners will bring, but argue they want to forestall old-age poverty in the future, even if it is not a problem at present.

Electorally, the move makes sense too.

Of the country’s roughly 82 million inhabitants, more than 20 million are already retired. Last year, Germans older than 60 made up 34.8% of the population compared with 27.8% in 1995. The share of those above 50 stood at 54.4%, up from 44.9% in 1995.

The over-50 aren’t just the biggest voting group, they’re also highly mobilized, pollsters say. A September Forsa poll showed 75% of Germans were deeply concerned about old-age poverty.

Much of this concern focuses on a provision that entitles all workers to a state pension worth at least 43% of their average income over their working years. The law expires in 2030, however, and economists warn that extending it without raising the retirement age would put too heavy a burden on the shrinking number of workers who maintain the program.

Labor Minister Andrea Nahles shrugged off this concern on Friday, proposing that the level should in fact rise to 46% through 2045. The move would be financed by higher employee contributions and €9 billion in fresh tax subsidies, something she argued was morally necessary and financially affordable given the country’s good economic health.

“I want to enable everybody to keep the standard of living they are accustomed to when they are old,” said Ms. Nahles.

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