systems themselves, and on the other by effecting structural shifts between private and public funding.
Among other things, this is done in pensions insurance by increasing tax subsidies for capital-covered
old-age provision, and in health insurance by changing regulations on co-payments and financing.
Pensions:
As in most western industrialised nations, the population in Germany will age considerably over the
coming decades due to low birth rates and increasing life expectancy. These shifts in the population
structure required and require additions to – and reforms of – the existing system of old-age provision,
which is mainly financed on a pay-as-you-go basis by contributions from the insured people and their
employers. Alongside the main pillar of statutory pensions insurance, corporate pension schemes and
private old-age provision form the second and third pillars of old-age provision. These supplementary
pillars are gaining in importance when it comes to safeguarding living standards for senior citizens. The
reforms in the field of old-age provision therefore impact all three pillars.
The first reforms of statutory pensions insurance were initiated back in 2001. The pension-adjustment
system that has been in force since 1992, which was related to net wages, has been replaced by a
modified adjustment related to gross wages. Although this still takes into account the annual change in
gross total wages and salaries per average employed employee, the actual pension adjustment is reduced
if contribution rates or the share dedicated to private old-age income provision rise – and vice-versa.
Furthermore, income from the Ecological Tax Reform (introduction of electricity tax, increase in mineral
oil tax) has also been used to reduce contributions to statutory pensions insurance by the labour factor.
Parallel to this – and this is the reform's fundamentally new element – voluntary contributions to a
supplementary, capital-covered old-age provision are now supported by tax subsidies.
These measures were supplemented in mid-2004 by the Pension Insurance Sustainability Act. Its most
important change was the introduction on 1 July 2005 of a sustainability factor that takes into account the
change in the ratio between pension recipients and contribution payers. If the number of contribution
payers declines relative to the number of people drawing pensions, the pension adjustment is reduced and
the contribution rate is stabilised. Furthermore, the tax-credit periods allowed for training were reduced,
and the age limit for an early pension following unemployment or partial retirement was raised to 63.
The measures are being supplemented by a gradual transition, up to 2040, to the downstream method of
taxing retirement income. In return, expenditure on old-age provision will gradually become tax-free up
to 2025, so that the overall result will substantial tax relief.
Overall, the reforms aim to keep the statutory pension financeable and avoid increasing the burden on the
labour factor. The objective is to prevent the contribution rate from rising above 20% by 2020 and 22%
by 2030. Without the measures taken, it would have been about one contribution-rate point higher in
2004 and about 0.6 points higher in 2005. Moreover, with the Pension Insurance Sustainability Act the
government has committed itself to examining (every four years, starting in 2008) whether the present
data and assumptions on the future demographic and labour-market developments are still valid in view
of the more up-to-date economic and demographic data that will then be available – and whether
legislation is needed to raise the statutory retirement age beyond 65.
Health:
Statutory health insurance also faces major challenges. The wage-centred contributory incomes^1 of
insured people – and therefore the revenues of the statutory health insurance funds – depend on the
employment situation and ultimately on the economic situation. The development of contributory income
per member has been weak and the change in the member structure of statutory health insurance (rising
proportion of contribution-paying pensioners) have among other reasons a negative effect on the income
side of the social insurance schemes. In addition the demographic development and medical progress
causes higher expenditure.
(^1) Incomes subject to the liability to pay social insurance contributions