You may know that Germany is the home of the modern social security retirement system. The 19 century imperial chancellor Bismarck, whose name has an uncanny similarity with a US state capital for a good reason, gave the country the social security system not out of the goodness of his heart - his nickname is Iron Chancellor - but because of widespread unrest and social upheaval.
Over the past 40 odd years, successive German governments have "reformed" the system many times. Reform is in quotes, because the term traditionally is benign, implying improvement, whereas modern usage really means cuts.
Some "reforms" have attracted little attention outside of the country, in part because they are obvious compared to other national systems, in part because they have been too small to make news.
The most significant example in the first category was the change from a post-tax deduction to a limited pre-tax regime.
For the longest time, German workers paid income tax on their social security deduction and were rewarded with tax free pensions.
This changed with the major "carrot and stick reforms" of the early 2000s. Small carrots, big stick, that is.
There now is a base amount of deductions that is tax free, and amounts beyond that can be claimed as deductions on the tax return, resulting in some tax savings. Retirement benefits are currently tax free up to some 5000 Euros a year, with everything beyond that taxable. Starting in 2040, all retirement income will be taxable. Given that payroll deductions are not completely tax free and income is taxable, some retirement benefits are effectively taxed twice.
The government is very happy about this.
The press reported this week that the 2017 pension hike will bring about 625 million additional tax revenue for the government by 2018, of which some 205 million are 2017, the rest in 2018.
This is not a negligible amount, given that three quarters of German pensioners are still not eligible for income tax on pensions as of 2017 because their total pension does not exceed the general income tax threshold of about 8600 Euros per year.
What makes this new system so attractive for the government are two factors. The first, already mentioned, is that workers pay some tax on deductions withheld. The second is the duration of pension benefits.
Average life expectancy has been rising and with it the duration of pension benefits, whereas the period in which workers pay into the system has not changed as much, although the percentage of deductions withheld has gone up too. Granted, full retirement age is rising to 67 years in the near future, but that's less than life expectancy has risen.
Taxing pensions shifts the balance. While social security will continue to pay out for a longer time, government tax revenues rise substantially. If some of these revenues are given back to social security, the government will look generous and fiscal conservatives can continue to complain about "increasing government subsidies to social security".
Other tweaks to the system could be dismissed as "nickeling and diming", but this would be a mistake because the sums of money are so huge that these nickel and dime measures add up to millions in annual "savings" (i.e. cuts) each.
One such under reported change in the big "reform" package was changing the payout of pensions from the beginning of the month to the end of the month.
While the social security carriers do benefit from this, the main beneficiaries have been corporate private pension plans. These invest contributions in stocks and equities, and an extra 30 days before each payout makes a big difference.
At the same time, the calculation of benefits from corporate plans was changed. The effect can be a "negative return". One example the blogster knows of is an older German who paid money into a voluntary corporate scheme several decades ago for six years. The benefit to be paid once the person reaches full retirement age was 3.50 Deutschmarks a month, i.e. 1.50 Euros, a buck and a half.
Roughly worth a pack of cigarettes at the time, the 1.50 will remain fixed forever, there will be no increase even if and when that person reaches retirement age at 67.
Last time we checked, a pack of cigs is at about 6 Euros, and in general inflation terms, one Euro bought roughly the same as one Deutschmark when the blogster moved to Germany years ago.
As a matter of fact, the cost of a bank transaction is currently at about 1 Euro per transaction, trending up, which means that our German is set for a serious negative return on those pension contributions taken out of a paycheck for six years straight.
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