Transcript Document

The Reform of the German
Pension System
By Georg Erber
Presentation at the
Faculty of Economics at the
Thammasat University
May 2, 2008
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Introducing myself
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I am working at the German Institute for
Economic Research, DIW Berlin
I have been teaching a couple of times as
Visiting Professor at the Department of
Economics of the Thammasat University
here in Thailand
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There is no Free Lunch
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Pension systems are very expensive social security
systems
They can absorb 20 to 30% of the actual workers
gross income in Germany
They even need significant additional tax subsidies
for financing
Three pillars of the German System (obligatory
pension payments, company based pension
schemes and voluntary individual pension schemes
Riester and Ruerup pensions)
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Topics of Discussion
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German Pension System
Aims and Key Elements
Key Challenges
Potential Options for Setting-up a Thai
Pension System
Necessary Knowledge Base needed to make
it sustainable
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German Pension System
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Historic origins
Introduced by Bismarck in 1891 as final part
of social security legislation
At first intended to support the fight against
the labour movement by offering an alterative
way instead of a revolutionary movement
then headed by the Social Democratic Party
to obtain full political power
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Aims of the German Pension
System - Then
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When introduced offering financial support
for workers older then 65 (average life
expectation at this time was 67 year) and
widows of workers and their children to avoid
poverty
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Aims of the German Pension
System - Now
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Before Reform: Guarantee a living standard close to
the one obtained during working age (before reform:
about 73% of the last wage or salary income)
After Reform: Lowered to about 54% after the
reform, which however gradually reduce this pension
payments by 2030, close to the welfare payments for
each citizen making it highly unattractive for the
young generation
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Traditional Key Elements
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Legal Framework: (Social Security Laws) set by the
German Parliament
Obligatory: Every employee should contribute to the
system to include an workers
Dynamic: Should be linked to the overall economic
development, i.e. compensate for inflation and
income growth of the rest of the population (dynamic
adjustments of pensions)
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continued
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Pay-as-you-go-system (beginning with
contributions of 15% of their gross income –
are paid by employed workers are used to
pay current pensioners)
low tax subsidies of about 15 to 16 % by
government in1989
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Changing Key Elements
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Due to a significant increase part-time and low paid
jobs the obligatory payments of contribution into the
pension system is no longer guaranteed (workers
are increasingly falling through this net)
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Weakened link between pension incomes and
general income development, slower increases in
pensions compared to the overall income growth
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continued
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Maintain the core pay-as-you-system (now at 19.9%
of gross income) but complement it gradually
by capital based financing (Riester pensions: 4% of
gross workers income)
by company-based pension systems: about 5-7% of
gross workers income)
Significant increase in tax subsidies (now 25% and
increasing further)
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Key Challenges
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Demographic Change
Changing Employment Biographies
Changing Financing System (contributions
by employers and employees versus
increasing tax subsidies)
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Demographic Change
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Demographics in Germany have and are
further changing dramatically and
unfavorably leading to an aging society
Low birth rates 1.3-1.4 children per woman,
below the sustainable population rate of 2.1
child)
Increasing life-expectation in Germany
(currently 76 years for men, 83 years for
women)
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Population Development in Germany
1950 until 2050
http://www.berlin-institut.org/index.php?id=48
http://www.berlin-institut.org/fileadmin/user_upload/Aktuelles/Deutschland.swf
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Changing Employment
Biographies
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Life-long full-time employment has lost dramatically
ground
Part-time employment and longer spells of
unemployment are increasing diminishing life time
worker incomes considerably
Rapid technological change and globalization lead to
a diminishing value of workers experience obtained
at a job in a particular company leading to lower
incomes after losing such jobs
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Changing Financing System
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Complementing the pay-as-you-go system by
capital-based financing
Due to diminishing payments into the obligatory
system there emerged a structural deficit
This led to rising costs for those still contributing e.g.
from 15 to 19.9% making labor less competitive due
to high wage costs
Further general tax subsidies increased from 15% to
more than 25%
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continued
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Introduce additional elements like voluntary
company pension capital-based systems negotiated
between trade unions and companies to compensate
for pension losses from the obligatory system (by
offering tax-incentives)
Introduce voluntary individual capital-based pension
systems (Riester and Ruerup pension schemes)
again offering tax incentives
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continued
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Longer education time in Germany at school
(43% obtain a college degree) and
universities (33% obtain a university degree)
for higher education reduce overall
employment time
Young and older people in the job market
face steep barrier to entry to obtain well paid
full-time jobs
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Potential Options for Setting-up a Thai
Pension System
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Define the aims properly according to social
justice and take care of sustainability
Avoid free-rider problems
Pay-as-you-go system versus capital-based
financing or mixed system
How much tax subsidies are needed?
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Necessary Knowledge Base needed to
make it sustainable
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Need for an accounting framework for
demographic change and intergenerational
accounting (see e.g. Kotlikoff ) http://ideas.repec.org/e/pko44.html#works or
Peter F. Bell The Economic Impact of Demographic Change in Thailand, 19802015: An Application of the HOMES Household Forecasting Model. by
Burnham O. Campbell; Andrew Mason; Ernesto M. Pernia, The Journal of
Asian Studies, Vol. 54, No. 2 (May, 1995), pp. 618-620
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Political debate needs facts about the future
trends and consequences of different
solutions
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EXPECTATION OF LIFE AT BIRTH FROM THE
SURVEY OF POPULATION CHANGE in Thailand
Year of Survey
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Life Expectation
Male
Female
1974-1976
58.0
63.8
1985-1986
63.8
68.9
1989
65.6
70.9
1991
67.7
72.4
1995-1996
69.9
74.9
Source : Report on The 1995-1996 Survey of Population Change,
National Statistical Office.
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Source:
http://thailandeconomy.blogspot.com/2007/12/
thailands-demographic-window-of.html
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TOTAL FERTILITY RATES BY REGION in Thailand
1995-1996, 1991 AND 1985-1986
Region
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1995-1996
1991
1985-1986
Whole Kingdom
2,022.0
2,173.5
2,730.0
Municipal Area
1,331.6
1,370.0
1,766.0
Non-Municipal Area
2,284.7
2,436.5
2,962.0
Bangkok Metropolis
1,260.7
1,134.5
1,735.0
Central Region
(Excluding Bangkok
Metropolis)
1,664.4
1,954.0
2,494.0
Northern Region
1,894.3
1,972.0
2,248.0
Northeastern Region
2,435.3
2,665.5
3,096.0
2,850.9
2,982.0
4,049.0
Southern Region
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What This Means
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Thailand will need a public pension system
reform, the current system will be insufficient
There is no time to waste since due to the
compound interest rate factor for delays later
pensioners will pay dearly
It is time to act now to draw a realistic plan to
avoid mass poverty later
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Compound interest rates factor
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assuming an 5% real interest rate
1000 Bhat invested now gives a return of
7040 Bhat in 2048
1000 Bhat invested in 2013 gives a return of
5516 Bhat in 2048 or 28% less than invested
five years earlier
1000 Bhat invested in 2018 gives a return of
4322 Bhat in 2048 or 63% less than invested
ten years earlier
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Next Steps
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Establish the necessary facts for the policy
debate in Thailand
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See e.g. the following literature http://www.ier.hitu.ac.jp/pie/Japanese/discussionpaper/dp2003/dp201/text.pdf
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Start a debate on the aims and scope of a
public pension system
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