Pension reform in germany introducing a multi pillar system to cope with demographic change
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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 . Many. Few. The motivation for a multipillar system. Problem 1: Babyboom and Babybust.

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Pension reform in germany introducing a multi pillar system to cope with demographic change

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


The motivation for a multipillar system

Many

Few

The motivation for a multipillar system

Problem 1: Babyboom and Babybust

„Problem 2:“ Increase of life-expectancy

Solution 2:

Increase retirement age

Solution 1:

Partial Funding

1950

2001

2050

Source: 11th Population Projection by the Federal Statistical Office


The riester reform 2001 a paradigm shift towards a multipillar system
The Riester-Reform 2001: a Paradigm Shift towards a Multipillar System

Three aims:

  • Sustainable contribution rates (below 20% until 2020, below 22% until 2030)

  • Secure long-term stability of pension levels: net replacement rate must stay above 67 %

  • Spread of supplementary private pension savings to compensate the lower pension level (individual and occupational pension plans)

Instruments

New Pension

formula

Retirement Saving

Incentives

Minimum Pension (means tested)


The reform package on the whole
The Reform Package on the whole Multipillar System

„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


The framework of the riester pension
The Framework of the „Riester-Pension“ Multipillar System

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

5


Saving incentives of riester pensions

Sponsoring by income and family status Multipillar System

State Spon-soring in % of savings

Gross income per year

Single

Single, one child

Married, single earner, no child

Married, single earner, two children

Saving incentives of Riester-pensions

/300

Source: Gasche (2008)


Does it work development of riester pensions
Does it work? Multipillar SystemDevelopment of Riester Pensions

Riester Pensions in Mio.

Building loan contract

13.6

Investment fund plans

10.8

Bank saving plans

5.6

1.4

Insurance plans

2001

1/2010


„Take-off“ after Amendment Multipillar System

(mostly the „Old-Age Retirement Income Act“ in 2005)

  • 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


Does it work riester pensions by number of children
Does it work? Multipillar SystemRiester Pensions by number of children

2 children

3+ children

No child

1 child

Source: Coppola and Reil-Held (2010)

9


Does it work riester pensions by income
Does it work? Multipillar SystemRiester Pensions by income

2. Quintile

1. Quintile

3. Quintile

4. Quintile

5. Quintile

... of the disposable household income distribution

Source: Coppola and Reil-Held (2010)

10


Alternative approach income structure of flat rate benefits recipients
Alternative Approach: Income structure of Multipillar Systemflat-rate benefits recipients

Source: Rieckhoff and Stolz (2009)


Does it work will the riester pension close the gap
Does it work? Multipillar SystemWill the Riester Pension close the gap?

%

of

avg.

I ncome

Pension gap

Riester pension

2010

2020

2030

Year of entry into retirement

Source: Börsch-Supan and Gasche (2010)

12


Conclusion
Conclusion Multipillar System

  • 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.


Backup

BACKUP Multipillar System


Promotion of occupational pensions with riester reform
Promotion of occupational pensions with Riester-Reform Multipillar System

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


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