Rürup Commission proposes later retirement age

In April 2003, the Rürup Commission - appointed by the German government to make recommendations for social security reform - proposed an increase in the normal retirement age by two years to 67. The commission's chair also said that, if the pension system is to remain solvent over the long term, larger penalties will be required to discourage workers from taking early retirement. A 'sustainability factor' should be introduced to take into account demographic changes, leading to slower annual increases in pension payments.

On 24 April 2003, the 'Rürup Commission', a special government panel convened to address the pensions and healthcare crisis facing Germany, unveiled a set of recommendations on pensions reform. It proposes: increasing the state retirement age gradually from the current 65 to 67, between 2011 and 2035; penalising early retirement; and reducing annual increases in annual pension payments. The latter would be achieved by directly linking the rate at which pensions are increased annually to the number of contributors to the system. The commission chair, Bert Rürup – a professor of economics and a member of the Council of Economic Advisors (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung) advisory group – said that keeping the pension system solvent over the long term would require the introduction of such a demographic 'sustainability factor' (Nachhaltigkeitsfaktor), whereby payments would be adjusted according to a formula that would take into account the number of pensioners and contributors.

These controversial proposals are being recommended because the number of pensioners has been climbing steadily in relation to the number of contributors, and will continue to do so. Today, 2.3 persons work to support one retiree in Germany. By 2030, according to reliable demographic estimates, that ratio could be more than halved. The commission warns that, without reform, pension contributions would have to rise to between 24% and 25% of gross wages by 2030. According to Mr Rürup, the commission's recommendations, which are to be supplemented by recommendations on boosting private pensions cover, would ensure that contributions do not have to exceed 22%.

A clear majority of the 26 commission members backed the report’s recommendations to limit the pressures on the state social insurance system, but trade union representatives on the commission opposed the proposals.

Background

In November 2002, Mr Rürup, an academic political adviser with considerable 'behind the scenes' experience in government, was named by Ulla Schmidt, minister at the Health and Social Affairs Ministry (Bundesministerium für Gesundheit und Soziale Sicherung, BMGS), as chair of the government’s new commission on the reform of the social insurance system (DE0212205F). The panel includes other academics as well as business and labour representatives, and officials from lower levels of government. At that time, Mr Rürup, who is a member of the governing Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD), said: 'The key to solving the unemployment problem in Germany lies to a very large extent with non-wage labour costs. If we do not succeed in getting subsidiary wage costs under control, we will not be able to solve our unemployment problem.'

Mr Rürup was not slow to make his mark. In November 2002, he caused a minor uproar by suggesting that the current practice of linking healthcare contributions to incomes be abolished in favour of a flat-rate system under which employers would make a monthly payment to employees, which the latter would use to buy their own health insurance. Unions opposed this idea, arguing that it broke with the tradition of employers and employees sharing the cost on a 50-50 basis.

The Rürup Commission, which filed its first report on healthcare reform on 9 April 2003, was not expected to reveal its findings on pensions for some months. However, the initial deadline of autumn 2003, set when the commission was established, was brought forward due, first, to the need for swift action regarding Germany’s parlous state finances and, second, to the need to present proposals in time for a special SDP conference on 1 June to discuss 'Agenda 2010'- Chancellor Gerhard Schröder's plan for economic revival (DE0303105F)

Reactions

The recommendations of the governmental pensions commission have further heightened tensions between Chancellor Schröder and his supporters, on the one hand, and trade unions in particular, on the other. Disagreement already existed between them on previously announced welfare and labour market reforms. Ursula Engelen-Kefer, a deputy leader of the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB), accused the Rürup Commission of exaggerating the negative impact of early retirement. 'At present early retirees only get a proper pension from the age of 65 and must accept considerable reductions during the interim period,' she stated. By contrast, Dieter Hundt, president of the Confederation of German Employers’ Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA), described the plans as 'pointing in the right direction'.

Many German economists agree with the proposals put forward by the pensions commission, as they are designed to tackle the financial implications of an ageing population. They regard the steady rise in pension contribution rates to the state-supported system - which, in 2003, have increased from 19.1% to 19.5% of gross wages, split equally between employers and workers - as one of the main factors behind the high non-wage labour costs seen as handicapping the German economy and employment.

Commentary

Most experts agree that the current German system, characterised by an actual average retirement age of about 60, needs to change. It is obvious that the proposals of the Rürup Commission will help to bring the actual retirement age closer to the current official retirement age of 65. However, to be even more successful any structural reform of the pension system has to go hand in hand with additional labour market reforms to break up labour market rigidities which still exist and hamper the creation of new jobs. The International Monetary Fund (IMF), for example, has argued that Germany compares poorly in terms of the employment rate of older workers relative to high-employment countries. For example, Germany could have 1.4 million additional jobs if it had the same employment rate as the UK in the 55-64 age group and an average retirement age of 63. According to IMF, 'the root of these problems' in Germany is 'overly generous benefits for the jobless: for older workers, benefits had been designed with the aim of facilitating a transition from work into retirement. Better job matching alone would not address these crucial weaknesses.'

Chancellor Schröder’s Agenda 2010, which plans to shake up the labour market, among other measures by considerably reducing the time limits for long-term unemployment benefits, is certainly a very important step in the right direction. However, this package is, in all probability, too 'timid' to do this job alone. It is not clear that German politicians have the political muscle to undertake the reforms that are, in economic terms, so urgently needed. (Lothar Funk, Cologne Institute for Business Research, IW)