IG Metall proposal for early retirement at 60 is strongly disputed

In October 1999, the German metalworkers' union IG Metall and the Federal Ministry of Labour agreed in principle on a new concept for early retirement at the age of 60. Wanting to give older employees the opportunity for early retirement without loss of pension rights, IG Metall proposes the creation of a "collective bargaining fund" which would make additional contributions to the statutory pension scheme for workers who have taken early retirement. As the government has rejected making a direct financial contribution, the bargaining fund would be financed by employers and employees. Employers' associations, however, have already refused to participate in such a system.

On 13 October 1999, during talks between Klaus Zwickel, the president of the IG Metall metalworkers' union, and Walter Riester, the Federal Minister of Labour, both parties agreed in principle on a concept for early retirement at the age of 60. The basic idea is that, from the age of 60, older employees should be given the opportunity of voluntary early retirement without reductions in their pension rights. Currently, those taking early retirement have to accept a 0.3% reduction in their pension for every month of early retirement. Since a standard retirement pension is paid from the age of 65, early retirement at the age of 60 would lead to an 18% reduction in the pension. In order to avoid such cuts in pensions because of early retirement, the Ministry of Labour has now agreed to create the legal preconditions by which reductions in pensions could be compensated by additional payments to the statutory pension scheme. Regarding the financing of these additional payments, however, the Federal government has made it clear that it will accept neither further public payments nor an increase in normal pension insurance contributions.

As an alternative, IG Metall has proposed the establishment of a special "collective bargaining fund" (Tariffonds) which would provide additional contributions to the statutory pension scheme in respect of those taking early retirement in order to compensate for losses in pension rights. According to the union, the "collective bargaining fund" would initially be introduced for a limited period of five years. The financing of the fund would be based on proportional contributions by employers and employees. Currently, IG Metall proposes that each side should contribute a yearly sum of 0.5% of pay to the fund. In addition, the state should indirectly support the fund by exempting these employee and employer contributions from taxes. Furthermore, the Ministry of Labour should declare the collective agreements which introduce such collective bargaining funds as generally binding in order to guarantee that a whole sector participates in such a system.

Early retirement in Germany

In the past two decades, early or partial retirement has always been an important instrument in German labour market policy. For a long time, generous early retirement provisions provided an effective instrument for companies to shed older employees, with the costs met partly by the social security system. During the 1990s, however, the government has changed various legal provisions in order to stop the continuous increase in the financial burdens on the statutory pension scheme. In 1992, the first important legal change was the introduction of a step-by-step increase of the normal retirement age. For most groups of employees, this will mean that the retirement age will be 65 in the next few years.

Furthermore, in 1996 the government replaced existing provisions on early retirement with a new partial retirement law (Altersteilzeitgesetz) which allows employees to work part-time (50% of normal hours) from the age of 55, while receiving at least 70% of their former income (DE9801146N). In addition, various collective agreements were signed which further improved the payments to 80%-85% of their former income for employees taking partial retirement (DE9708224F). The Federal Employment Service (Bundesanstalt für Arbeit) estimates that since the introduction of the new partial retirement law in 1996, around 100,000 employees have made use of the scheme.

One major problem with the current partial retirement scheme, however, is that the employees who take partial retirement have to accept significant reductions in their pension. There are only very few company agreements on partial retirement which also provide some compensation for the reduced pensions. In the coming years, the system will further lose its attractiveness for older workers, since the raising of the normal retirement age will also increase the reductions in pension rights.

After the election of a new Social Democratic government in September 1998, the trade unions called for a new "pact between generations" (Pakt der Generationen), which should allow employees to retire at the age of 60 without any losses in pension. Demanding substantial improvements in partial and early retirement scheme, the unions put this topic on the agenda of the new tripartite "alliance for jobs", which agreed in principle to find "more flexible and improved opportunities for early retirement through new legal provisions, collective agreements or regulations at establishment level" (DE9812286N). In order to elaborate and discuss new forms of early retirement, the alliance for jobs established a separate working group on the issue, composed of representatives of trade unions, employers' associations and the Ministry of Labour. In July 1999, during the third round of top-level talks within the Alliance, the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB) and the Confederation of German Employers' Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA) produced a joint statement in which they underlined the need "to find new employment-promoting forms of early retirement, which include acceptable conditions for the employees" affected (DE9907219F). As a first result, all parties agreed on a revision of the partial retirement law which will lead to an increase in the number of employees taking advantage of early retirement and improve the possibilities, in particular for small and medium-sized companies, to obtain financial support when implementing partial retirement.

Number of employees concerned, costs and labour market effects

The proposal made by IG Metall would mean that over the next five years all employees aged 60 or older, who have contributed to the statutory pension system for at least 35 years, should have the opportunity to take early retirement without reductions in pension rights. According to IG Metall figures, there are currently about 2.5 million employees between the ages of 55 and 60. If 80% of these employees were to take advantage of the opportunity for early retirement, and if between one-third and two-thirds of these positions were filled by new employees, then between 660,000 and 1.32 million new jobs could be created. Regarding the overall costs of this model, IG Metall estimates that between DEM 60 billion and DEM 70 billion would be necessary to compensate for possible losses in pensions.

According to figures published by the Ministry of Labour, there are only between 1 million and 1.2 million employees who might be affected by a new early retirement scheme from the age of 60. The necessary additional payments to the statutory pension scheme would range from DEM 45,000 to DEM 100,000 per employee, depending on the different categories of employee (male, female, disabled etc). Without additional payments to the statutory pension fund, the sums needed to ensure full pensions for those taking early retirement at the age of 60 would lead to an 0.4% increase in normal pension insurance contributions.

Reactions to the IG Metall proposal

The agreement in principle between IG Metall and the Ministry of Labour on a new system for early retirement at the age of 60 drew strong criticism, in particular on the side of the employers. In a statement, the president of BDA, Dieter Hundt, declared that German employers will not agree on a "collective bargaining fund" in order to compensate for reductions in pension arising from early retirement at the age of 60. According to Mr Hundt, the proposed early retirement scheme would lead to an unacceptable increase in non-wage labour costs and, therefore, would not create new jobs but destroy more existing ones. Furthermore, the experiences of former early retirement schemes have shown that in only one out of seven cases of early retirement was a new job created. The president of the metalworking employers' association Gesamtmetall, Werner Stumpfe, stated that the whole concept of generalised early retirement at the age of 60 is misleading. Considering longer life expectancy as well as other demographic developments in Germany, there will be a need for longer lifetime working hours in the future.

Although the employers have sharply rejected IG Metall's proposal, they have also underlined their interest in an improved "flexible system of early retirement". On 21 October 1999, BDA therefore announced a counter-proposal, which essentially aims at further improvements in the partial retirement scheme. In addition, the employers are ready to negotiate on a full or partial compensation for reduced pensions as a result of partial retirement. Branch-level collective agreements should determine a framework for specific solutions at company level. Finally, BDA has proposed the extension of capital-based company pension schemes as a "second pillar" to the statutory pension scheme.

Among other trade unions, the reactions to the IG Metall's proposal have been rather reserved. While the president of the Public Services, Transport and Traffic Union (Gewerkschaft Öffentliche Dienste, Transport und Verkehr,ÖTV), Herbert Mai, has welcomed in principle the proposal as an opportunity to create new jobs for younger employees, most other unions have taken a more sceptical view. The president of the food and restaurants workers' union (Gewerkschaft Nahrung Genuß Gaststätten, NGG), Franz-Josef Möllenberg, for example, declared that because of the the food and restaurant sectors are made up largely of small and medium-sized enterprises with a high fluctuation of employment, the proposed system of early retirement at the age of 60 would not work. Representatives from various other sectoral unions stated that they would prefer a further improvement to the existing partial retirement scheme.

Since the proposed system of early retirement at the age of 60 would initially be limited to a period of five years, there has been much public discussion about whether younger employees are ready to pay for a system from which they would probably never benefit, and whether this would further intensify the "conflict between generations". In contrast with these debates, however, a recent poll by the opinion research institute Polis indicates that 77% of all Germans support the idea of early retirement at the age of 60, while only 20% are against it.

Commentary

Making room for younger employees is the simple logic behind IG Metall's proposal for a new system of early retirement at the age of 60. Considering Germany's persistently high rate of unemployment there can be little doubt that further working time reductions are needed, including reductions in the retirement age. It also seems clear that, in particular for employees with a lower income, working time reductions will find no acceptance when they lead to further cuts in income. Therefore, the IG Metall proposal is consistent, since it seeks a way of avoiding a reduction of pension entitlement as a result of early retirement.

Whether the introduction of a "collective bargaining fund" is an adequate and practicable solution to the problem can of course be questioned. First, it might be questioned whether or not the financing of early retirement should exclusively be limited to the collective bargaining parties with no, or nearly no, contribution from the state. Second, questions have been raised over whether it makes sense to build up a further pension scheme through collective bargaining funds instead of finding a solution within the existing statutory pension scheme. Third, the introduction of a collective bargaining fund might function well in some sectors but would not do so in other sectors. In the end there might be various models with rather different consequences for the employees. Finally, in order to reduce unemployment it is essentially more a question of whether it is appropriate to put the focus on early retirement instead of promoting other forms of working time reduction. (Thorsten Schulten, Institute for Economic and Social Research (WSI))

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