The New German Social Security Reform Proposal

The German Pension Security Commission this week issued its proposal for reform of Germany’s Social Security program, and the Merz government said it would accept the proposal in whole and push it quickly through the Bundestag. Notable features of the proposal, put together by a committee of technical experts and politicians, are the introduction of personal investment accounts, an increase in regular and early retirement ages, disability reforms, changes to rules governing employer-provided retirement plans, and an explicit rejection of raising the cap on taxable earnings. Like other European countries and the US, Germany is experiencing falling birth rates and rising lifespans, which make pay-as-you-go social insurance systems more expensive to sustain as the labor force shrinks and costs rise. Without reform, under the current-law automatic stabilizers, the contribution rate would have to increase, and benefits would have to be cut. To avoid that outcome, the Germans are proposing the following main features of their reform plan: Include employer pensions and retirement accounts with Social Security in a government-managed electronic personal retirement reporting and planning tool for workers. Modestly increase the standard retirement age in line with increases in life expectancy; this is projected to raise the age from 67 in 2031 to 67.5 in 2041. Abolish the current popular option to retire early (from 63 to 65, depending on birth year) with no benefit reduction for those with long working careers. Increase the early retirement age (with actuarial reduction of benefits) from 63 to 64 soon and increase it further later in line with changes in the standard retirement age. Extend the trial work period for disabled beneficiaries to attempt work from six months to one year and reduce the benefit penalty for successful reentry to the labor force. Also introduce a retirement benefit, after medical evaluation for disability, for those who cannot work in their long-time occupational field, that is an unreduced pension two years before the standard retirement age and with reduction for an additional three years, provided the claimant worked for at least 35 years. Examine further reform options to reduce widow(er) pensions. Raise the age limit for partial retirement from employment and access to employer pension benefits from 55 to 58, and link increases in that age to increases in the standard Social Security retirement age. Make future automatic balancing responses for Social Security to changing demographic and labor conditions more weighted toward benefit adjustments than contribution increases, also considering the contribution rate for the new retirement investment account described below. Create a temporary benefit increase, financed from general revenues, for those near retirement to make up for their short contribution period to the new retirement investment account. Maintain the current uniform payroll tax rules, including the cap on taxable earnings at two times the average wage.   Include individuals not currently in the system, that is, those beginning self-employment, federal and state parliament members, and those with “minijobs,” in mandatory contributions. Implement the proposed and any future Social Security benefit changes in the pensions of state and federal government workers. Following the Swedish model, introduce a funded element (individual accounts) to the Social Security program to add diversification of economic risks and revitalize the European capital market. The extra contribution rate of 2 percent, jointly funded by the worker and employer to the individual account, will be gradually introduced, starting at 0.5 percent in 2028, with the long-term expectation that total pension benefits will increase above current levels and the contribution rate for the pay-as-you-go segment eventually will be reduced, reflecting the changes mentioned above. The default investment fund will be a public, low-cost (below 10 basis points), globally diversified pool, but workers can choose from a limited number of certified investment funds managed privately. A governance structure will be set up to ensure against misuse, including for political purposes. The funded benefits will be paid out as a lifetime annuity. The focus of the account will be on maximizing returns; other considerations, such as recognition of the risk of reduced earning capacity, social compensation, and provision for survivor benefits present in the current Social Security program, still must be worked out but will be secondary. Integrate the design of the new early-start pension (like Trump accounts) for children with the new individual retirement account; in particular, the same investment pool and administrative structure should be used for both. One must express admiration for Germany on their clean, comprehensive, balanced and largely sensible Social Security reform proposal, compared to the continued inaction in the US. The post The New German Social Security Reform Proposal appeared first on American Enterprise Institute - AEI .