A recent study conducted by ZEW together with the German Institute for Economic Research (DIW) on behalf of the Bertelsmann Stiftung has recalculated how serious the problem of old-age poverty actually is. The study estimates that, in twenty years, one in five newly retired people in Germany will be at risk of falling into poverty, compared to one in six new retirees today. An individual is seen to be at risk of falling into poverty if their income amounts to less than 60 per cent of the national median income. The study also shows that around seven per cent of the newly retired (compared to around three per cent today) will be in a position to claim old-age basic income support. Particularly affected by this are low-skilled workers, single women, those declared unfit for work as well as people who have experienced long-term unemployment or who are self-employed.
"Politicians should address the at-risk groups directly"
Many of the possible reforms currently being discussed would do little to help these groups of people. If, as suggested in the SPD’s planned pension reform, the official lower threshold of the pension level is stabilised at 48 per cent instead of remaining at the current statutory level of 43 per cent until 2030, the primary beneficiaries would be people with higher entitlements under the statutory pension insurance scheme. The SPD’s other suggestion of a “solidarity pension” (Solidarrente), which would guarantee low earners with long-term pension insurance cover a minimum pension above the basic income level, would also benefit precisely those people who have been consistently paying into statutory pension insurance for decades. However, this group of people rarely struggles with poverty in old age.
Raising the state pension level will do little to help those at the highest risk of falling into poverty after retiring since these people draw very little from this pension in the first place. Politicians should instead address these at-risk groups directly, for example, by creating greater incentives for these people to pay into additional private pension funds. The problem here is that private and corporate pensions have up to this point counted towards the old-age basic income. As a result, it is not always worthwhile for low earners to build up additional savings for their retirement. Doing so often means making higher contributions only for the payouts to be offset against the basic income. This is where potential incentives could be implemented, for example, by recognising certain exemption thresholds in the basic income.
"The key to reducing the risk of poverty in old age is to provide for as few gaps in people’s employment histories as possible"
However, the key to reducing the risk of falling into poverty in old age is not through pension reform. Even if low earners and people with gaps in their employment history were to have additional income from state, private or corporate pension plans thanks to these reforms, the amount these groups of people would receive would still not be particularly high. Simply put, people who do not earn very much, are not able to pay very much into a pension plan. The risk of only having a very low net household income during retirement and being affected by old-age poverty is in fact determined over the course of a person’s working life.
The key to reducing the risk of poverty in old age is to provide for as few gaps in people’s employment histories as possible so that they can later receive a higher income from state, private and corporate pension plans. Achieving this is, of course, extremely difficult without sustained positive development in the labour markets, policies to help reintegrate the unemployed and inactive persons into the workforce, and a better balance between work and family responsibilities. Encouraging these things would also address the poverty risk faced by other groups including single parents, low-skilled workers and the long-term unemployed.
This piece initially appeared on 22 July 2017 in the "Börsen-Zeitung".