Like the French, Germans retire early (on average at between age 59 and 60) and for Germans, this early retirement is seen as a social achievement. Some polls, however, show that younger Germans do not believe they will receive an adequate pension in their old age and attempts at reform are underway.
The Germans have had a public pension system for over one hundred years, and their system has often been the model which other countries emulate. The German pay-as-you-go system in it current form began in 1957 with a pension benefit and a flexible retirement age. In 1972, the retirement age for old age pension was lowered, and old age disability pensions were created. The “Century Reforms” of 1992 and 2001 decreased benefits throughout the pension system in an attempt to stem the fiscal problems which occur in an aging society. The 1992 reform included a variety of changes such as making pensions dependent on pension type (discussed later) and indexing the average pension benefit for the entire system to net wages instead of gross wages as done previously. The 2001 reform will gradually reduce replacement rates from 72% in 1997 to 64% in 2030. Let us first look at the private sector:
Gesetzliche Rentenversicherung (GRV)
This public retirement insurance covers 85% of the German workforce and is mandatory with exemptions for civil servants and some self-employed. Generally this is the only money individuals receive in old age, since individual retirement accounts and occupational pensions do not play a major role in Deutschland. The program is financed 70% through a payroll tax split evenly between employees and employers (the tax is currently 19.5% of gross wages), and 30% through earmarked indirect taxes (VAT and a gas tax).
The GRV offers flexible retirement, with full benefits occurring at age 63 for most men, but age 60 for women, the unemployed and the disabled. GRV pays no spouse benefits, but there are survivor’s benefits which are 60% of the deceased mate’s former benefits. As of 1998, the average replacement rate was 70.5%–meaning one could make almost three-quarters one’s working salary during retirement.
The formula to determine one’s pension depends on the following four factors:
- Relative earnings position – computed by averaging average pension contributions over working life
- Years of Service
- Pension Type – There are 5 types. The retirement age/necessary years of service are in parentheses.
- Normal (65/5), Long Service (63/35), Women (60/15), Older Disabled (60/35), Unemployed (60/15)
As you can see, from point (3), while retirement is officially at age 65, many people retire earlier. Two of the most common routes to early retirement are:
- Go on the Unemployment rolls at age 57. One will be able to collect Unemployment Insurance (UI) for three years or negotiate a severance package with one’s employer. At age 60, an individual will be able to qualify for a pension.
- Go on disability at age 60. One must prove to be at least 50% physically disabled and pass an earnings test to qualify.
Civil Servants receive an even more generous package than those in the private sector. Replacement rates for civil servants are 75% of gross (pre-tax) wages, compared to 70% of net (after-tax) wages for the private sector. Benefits are a function of 1) years of service, 2) last gross wage, and 3) a new adjustment factor for early retirement.