The retirement system of the first industrialized country in the world that introduced a social security system is under continued stress. In itself, that's not news for Germans because the country has been doing what US conservatives call "entitlement cuts" for at least 25 years.
Twenty five years, and more cuts are to come.
Don't worry if you have never heard of social security retirement benefits cuts, many Germans would also dispute that they have been going on for over 25 years. And didn't the current government add a "mother's retirement benefit (child care bonus)" a couple of years ago at the same time as it made Germans with 45 years of contributions by age 63 eligible for full retirement benefits?
No wonder even Germans are confused.
Let's start at the beginning
This discussion is about people who paid into the government social security retirement system. Workers and salaried employees up to a certain income cap. Employers paid half, workers the other fifty percent. Most entrepreneurs would not pay in, and none of those civil servants who had the coveted status of "Beamte" has ever paid in. Some small groups, like farmers or freelance artists, were given a subsidy by the government, basically meaning the government paid the "employer share".
Someone who reached retirement age (age 65) about 30 years ago would enter his or her golden years with some 60% of the last net income.
No income tax was payable on social security retirement benefits.
Statisticians and economists at the time looked at the country's demographics and said there won't be enough working age people to pay the same benefits in 30 years from now.
Thus, cuts began, small, largely unnoticed. For instance, young government employees in non-Beamte jobs who left government for greener pastures would find that they voluntary supplementary pension plan payouts were capped at the amount accrued at the time, no inflation adjustments would be provided. After six years of contributions, that came out to about 3 Deutschmarks per month, a glorious 1.5 Euros nowadays, hence less than the cost to print a statement.
Initially, cuts for social security retirement recipients were made in fits and starts. Unemployment went up, so older people were enticed into early retirement at full benefits, and the percentage of payout was reduced by a few percentage points for future retirees.
After the reunification of Germany, East German retirement benefits were set at a lower rate than for those in the West, with the as yet unfulfilled promise to equalize payout percentages in the future. While benefits in the former East Germany have risen faster than in the West, they are still not the same - 25 years after East Germany disappeared.
At the same time, several hundred thousand East Germans who had fled to the West were informed that the 1:1 match of time worked in the East and time worked in the West was retroactively cancelled for anyone who had not reached retirement age by reunification.
The changes in the 1992 law affected subsets of the population in a substantial manner but sweeping changes with the biggest cuts came with laws in 1999, 2002, and 2005.
Keeping the level of payroll taxes stable and reducing the cost to employers was the main political goal. Both conservative and social democrat led governments implemented changes and cuts, with the social democrat/green government in the early 2000s conducting the deepest and most sweeping reforms.
Among the numerous changes reducing personal entitlement points were the reduction and/or elimination of points awarded for times spent in education and for military service, reduction of points through shortening of unemployment benefit times, up to complete elimination of points for recipients of basic means tested benefits.
These changes meant that even an unchanged overall payout percentage level would reduce retirement benefits for affected individuals because the period of time counted towards eligibility was reduced. Did we mention that the formulas for survivor benefits as well as disability benefits have been "adjusted", too?
In addition, the 2005 law introduced a phased increase of retirement age from 65 to 67 years and instituted a penalty for early retirement to the tube of 0.3% per month up to a total of 14.4%.
The country's poorest workers face an additional hurdle in that any recipients of basic means tested HARTZ IV benefits can be forcibly retired after age 62. This is legal because HARTZ IV is a "non contributory scheme" as opposed to social security retirement contributions, and the law says that benefits from a non-contributory scheme are only awarded when other means are exhausted. If the German government forcibly retires a citizen, early retirement penalties still apply.
That's still not all of the possible pain. We have still not discussed the mandated reduction of the overall payout percentage. This job, if you will, is performed by changing the formula used to set the level of benefits over time.
As of 2015, the overall level stands at 48% of last net income, and it is projected to fall to 45% by 2029. The stated intention of political leaders is that the level is not to fall under 43% in 2030.
If you doubt the value of "stated intention", welcome to the club.
The piggy bank
Some social security funds have been used by past German governments for general fund purposes. Getting hard numbers is not very easy, in part because the social security administration fulfills functions in addition to administering retirement benefits. For these extraneous functions, the federal government transfers money out of the general to the carriers. As of now, experts have calculated that the government transfers are about 20 billion Euros per year under what they should be to cover the extraneous functions.
The private retirement scheme that bombed: Riester.
It's a German fashion to name a scheme by the main guy who came up with it. Hartz IV was named after Mr. Hartz, who later became a felon, convicted of corruption. Mr. Riester was the gent who developed the blue pill of the entitlement cuts, wherein the government would give workers a small bonus when they set up a private supplementary retirement plan.
Insurance companies loved it. Their reps reaped commissions, and the return on Riester was abysmal. Low income workers didn't even get as far as handing over cash to insurers because they simply couldn't afford it. Also, there were little known, and now declared illegal, claw back provisions for the bonus.
Anyway, even arch conservative Bavarian prime minister Seehofer declared the scheme a failure in 2016.
The other carrot: company supplementary pensions - "401(k)-ish"
German employers didn't want to appear too greedy either and accepted to set up company pension schemes. The basic version simply means that a company takes some of the wages/salaries/bonus payments and invests it on behalf of an employee. Some companies are nice and offer some degree of matching or 100% premium coverage. The problems? A claw back or lose all period of five years and no or limited transfer of the account upon job loss or change of employer.
So, carrot 1 is rotten, eaten up by insurance maggots, carrot 2 may work somewhat better - if you manage to hang on to a job for five years or more.
Hey, wait, there is more pain!
German social security retirement benefits are in the process of transitioning to fully taxable income. The system goes from after tax contributions to pre tax, and - with some logic - taxation of received benefits as people retire. Since the threshold of tax free income is notoriously low in Germany, even retirement only marginally above the poverty level will be taxed. Any additional previously taxable income will be added to the social security pension, moving people up to a higher percentage in the tax table.
Health insurance premiums are due on retirement benefits at the rate paid by active workers. That rate was based on a 50/50 worker/employer split until 2015, when a new law froze the employer portion and floated the worker portion in line with insurers' premium adjustments. Since health care premiums simply don't go down, the year 2016 saw a hike for workers and, consequently, for retirees. Premium payments for a mandatory "long term care" insurance have also been offloaded completely on workers (and hence retirees).
As a result, the average social security retirement benefit for a male in West Germany in 2012 was:
1027 Euros if the male retired in the year 2000
898 Euros if the male retired in 2012
Amounts were, unsurprising, lower for women, already under the current poverty level.
In 2011, 15% of women and 10% of men had a retirement income (all sources combined) of less than 750 Euros a month, i.e. under the level of poverty. 20% of couples had less than 1500 a month.
The present media upset
A study projects that almost 50% of German retirees face benefits below the official poverty level in 2030, currently just under 700 Euros, and would then be eligible for "basic old age benefits" to top up their pension.
The study obviously hit a raw nerve. The employer association of the Christian Democrats, chancellor Merkel's party, denounced the numbers as unreliable projections and declared opposition against the government junior party SPD's talk about stabilizing benefits.
Conservative Frankfurter Allgemeine came out swinging with an article entitled "The myth of old age poverty".
The author claims that, by government forecasts, benefits would increase by 41% by 2029. Adjusted for inflation, he claims, benefits would effectively be 15% higher than today.
It took a couple of his readers to point out that a realistic, inflation adjusted increase with his optimistic numbers would be around 4% for someone who is a retiree today. Factoring in the reduction of the overall payout percentage, his calculation unravels.
While demographics are working against the German social security system, with the country's population projected to shrink and a minimum of 400 000 immigrants a year not necessarily arriving to stay, there is another part of the story.
German top income tax was reduced from 53% to 42% during the same period retirement benefits for workers were reduced.
But even at the 42% top rate, few Germans actually pay it, according to this site.
Capital gains tax is a single rate tax, and the rate is 25%. This flat rate is a reduction by more than half versus the old top income rate and about a third compared to the new one. Justified as an incentive to reduce capital gains tax evasion, the results turned out to be miserable: revenue dropped by about one third (almost 4 billion Euros) in the first year after the change.
In 2016, retired civil servants of the privileged "Beamte" group receive a guaranteed minimum pension of about 1600 Euros per month* without ever having paid contributions to a retirement scheme. The average civil servant pension in 2012 was about 2350 Euros.
* Minor variations by state.
[Update 4/18/2016] In the torrent of conservative publications, all of a sudden, one appeared that not only supports what the blogster wrote above, but adds more information. And disappears from the front page as quickly - leaving the space to the strident "we cannot afford better retirement payments" camp. Did the resident TV critic of Frankfurter Allgemeine know what he was doing when he wrote "the changes to the retirement system were creative redistribution", and "government could not reduce wages, so they cut the social benefits side".
Repeal of the wealth tax
The article mentions another tax, which the blogster neglected to bring up. That cut, again during the benefits reduction, affected Germany's wealth tax (a tax on assets, or comprehensive property tax). The tax affected only wealthy Germans and brought in some 4.5 billion Euros when it was last collected in 1996 - which would likely be at least 10 billion a year today.
There were also several measures of tax relief for companies, but the blogster has no good stats for these.
In short, both conservative and social democrat/green governments have massively redistributed wealth from the less fortunate to the rich over the last quarter of a century.
If we take only the known 20 billion in extraneous costs and add estimates of lost revenue from the capital gains tax and the wealth tax, we already arrive at a minimum of 30 billion Euros a year, which is more than the country spends on all of the basic means tested HARTZ IV for over 4 million people, and is also about 10% of annual social security retirement payments (except disability and survivor benefits).
Squeeze at the bottom: sales tax, electricity tax, renewables subsidy
Hacking away at entitlements, consecutive governments also embarked on increasing tax revenue by increasing non-food sales tax (15% in 1995) to 19%, by introducing a new electricity tax (revenue about 7 billion in 2012) as well as a levy on electrical power to finance subsidies for renewables. The price of electricity for consumers went from about 15 cents/kWh to just under 30 cents in 2015. Almost half of the price is sales tax, renewables subsidy and electricity tax. The levy on electricity was designed in such a way that the biggest users (again, companies) are either fully exempt or pay a laughable rate.
Of course, energy efficiency can bring some savings, but studies have shown over and over hat people at the poverty level cannot invest or exploit sales prices because they simply don't have the needed cash.
Thus, it becomes clear that retirees faced tax hikes on basic necessities at the same time their entitlements were lowered.
While the whole world knows that U.S. wages have remained flat for decades, Germany proudly points to increases, even though they have been small. The fact that additional taxes, levies and social security cuts/premium hikes have canceled them out is not part of the official success story of Germany's current budget surplus.
The country's civil servants know their numbers, so it comes as no surprise that their minimum pension appears to reflect a figure that covers real rent and living expenses for someone without college education rather well.
It is also a smart power move to keep the core civil servants happy while the poorer folks get fleeced. A bit like continuing to pay the military in the U.S. when the government is shut down.
Where do they go from here?
As the deep cuts affect more Germans, expect many more stories like the one told in the surprisingly frank article. Having worked and paid into the system all her adult life, one TV talk show panelist is now on full disability under the poverty level. The current official phrasing is "one of a number of individual cases".
If the blogster is not mistaken, the redistribution from poor to rich may slow down a little but won't stop because playing the young against the old has worked too well for several decades.
[Update 4/20/2016]
This PDF file shows the nominal income tax compared to the average effective rates Germans paid in 2015. The effective average paid by earners eligible for the top rate of 42% is between 27% and 29%, much less scary than the lamented high income tax burden conservatives love to quote.
Increases in worker retirement payouts will return an additional 720 million Euros next year to the government as income taxes paid on benefits by the workers.
[Update 4/21/2016] Under the headline "A third of the federal budget goes into retirement funding", Frankfurter Allgemeine continues the "we cannot afford it narrative". They fail to mention that a large part of this money compensates the insurance carriers for extraneous functions. The article gives a couple of data points regarding our "Beamte" civil servants, stating that starting in 1999 they "contribute to some extent" to their pensions by getting smaller raises than others. The money thus saved goes into a fund. As of 2016, that fund has some 835 million Euros, which is, let's be frank, peanuts. After 15 years of build up, it is not much bigger than the additional tax revenues from regular retirees projected for a single year. Not contributing to retirement 25 years after "regular" benefits began to be slashed, is an achievement.
It seems no coincidence elected officials in Germany are given the same status as "Beamte". A higher take home pay (no payroll taxes) than workers outside of government, lower retirement ages in many sectors, a guaranteed minimum starting pension more than 50% higher than the average regular retiree represent a pretty good deal.
[Update 4/24/2016] Another news cycle in the debate sees the government defend the "Riester" scheme with the choice words "people will get their money back", the equivalent of putting your money under a mattress, except that the mattress is stored at an insurance company and you pay storage fees for the privilege. There is talk about legislating coverage for individual self employed people, but the "enterprise wing" of the social democrats is warning against a policy that focuses on lower earners and wants measures to "bring the better earning middle class" back to the party as it hovers around the national 20% mark - as opposed to the conservative CDU/CSU with at least 35% of voters nationally.
Notably absent from the latest trial balloon is raising the payroll tax cap - which is much lower than in the US, where it has been criticized as being too low. Not a word on making the protected civil servants contribute to pensions either. The total cost of pensions for this group was around 40 billion Euros in 2012, or about 10% of the country's total spending on retirement benefits.
Conservatives and "free market liberals" once again demand raising the retirement age from 67 to at least 70. They fail, of course, to note that this would punish workers in physically demanding and dangerous industries who, even today, hardly make it to the official retirement age of 65 and see benefits cut by 0.3% per month for each month they retire before 65.
[Update 4/25/2016] We have some more figures on the phasing in of taxing all social security retirement benefits in exchange for exempting future social security contributions from payroll tax. Of Germany's 20 approximately million retirees, some 3.9 million are liable for income tax in 2016. That figure increases to around 4.4 million in 2017, and everyone who retires this year will see 72% of benefits be liable for taxes if he or she exceeds the general basic income tax free amount of 8450 Euros a year.
Yes, gradually moving from post tax to pre tax contributions has raised complaints about double taxation because of the math involved in the shift, but courts have decided there is nothing people can do about it - basically admitting the damage is small enough to ask citizens to just suck it up.
[Update 5/3/2016] For a solid two weeks, German conservative newspapers tried their best to ignore even the most egregious flaws of the supplementary Riester insurance, and none of them called for making "Beamte" civil servants pay retirement and health insurance contributions like other workers. This changed on Sunday, 1 May. Whether it has something to to with May Day being international labor day remains anyone's guess. For the first time, the Sunday edition of Frankfurter Allgemeine called for changes to Riester, including what amounts to a penalty for very poor retirees. Retirees who need the German equivalent of SSI currently see all of accrued Riester benefits, meager as they are, deducted from their SSI. That same article also explicitly called for making Beamte contribute to their retirement benefits.
At the same time, coming from a conservative background, the article blames the Social Democrats and conservative outlier Seehofer of Bavaria for making the current debate a conflict between the old and the young of the country. This is a misplaced accusation because the last 30 years have seen that very blame game played, ultimately with success, by conservatives and "free market liberals" (FDP).
As it stands, nobody in the main media has pointed out that the tax breaks to the wealthy the blgster summarized above would easily cover any proclaimed "shortfall" in government revenue.
[Update 6/21/2016] Inheritance tax breaks for company owners have a long tradition in Germany as one of the cornerstones of the conservative parties CDU/CSU. So, when the country's constitutional court ruled in late 2014 that the different treatment of company owners versus everybody else violated constitutional equality provisions, some hoped to see a less distorted inheritance tax system. The deadline mandated by the court was June 2016, and negotiations within the coalition government exhausted the timeframe. Only on 20 June was a compromise reached, and the parties announced the change of the law would bring in an additional 235 million Euros in inheritance tax each year. That's not much compared to the total revenue of 4.305 billion in 2012. Of this, 48.7% were paid on inheritances worth less than 500 000 Euros, 51.3% on estates worth more than 500 000 Euros.
It was, in fact, easy to pass on a company worth millions without paying a single cent in inheritance tax. Companies with fewer than 20 permanent employees were exempt from proving the basic requirement for tax exemption: keeping the same number of employees for seven years. While the new law lowers this number of employees to 5, multiple complex formulae are applied, and companies worth up to 26 million continue to get tax discounts.
The new law also changes the way a company's revenue value is calculated for the purpose of inheritance tax, cutting it to just over half of the current valuation.
There is also a new provision that allows some heirs to postpone paying inheritance tax for 10 years without incurring interest.
The blogster is willing to be the Susan B. Anthony dollar coin that refuse to go away on this: the effective additional revenue from the changed rules for transferring companies to heirs will be substantially less than 235 million next year.
* Gender neutral.
No comments:
Post a Comment