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04/19/231
The Reform of the German Pension System
By Georg ErberPresentation at the Faculty of Economics at the Thammasat UniversityMay 2, 2008
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04/19/232
Introducing myself
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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04/19/233
There is no Free Lunch
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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04/19/234
Topics of Discussion
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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04/19/235
German Pension System
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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04/19/236
Aims of the German Pension System - Then
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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04/19/237
Aims of the German Pension System - Now
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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04/19/238
Traditional Key Elements
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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04/19/239
continued
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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04/19/2310
Changing Key Elements
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)
Weakened link between pension incomes and general income development, slower increases in pensions compared to the overall income growth
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04/19/2311
continued
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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04/19/2312
Key Challenges
Demographic Change Changing Employment Biographies Changing Financing System (contributions by
employers and employees versus increasing tax subsidies)
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04/19/2313
Demographic Change
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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04/19/2314
Population Development in Germany1950 until 2050
http://www.berlin-institut.org/fileadmin/user_upload/Aktuelles/Deutschland.swf
http://www.berlin-institut.org/index.php?id=48
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04/19/2315
Changing Employment Biographies
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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04/19/2316
Changing Financing System
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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04/19/2317
continued
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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04/19/2318
continued
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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04/19/2319
Potential Options for Setting-up a Thai Pension System
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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04/19/2320
Necessary Knowledge Base needed to make it sustainable
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, 1980-2015: An Application of the HOMES Household Forecasting Model. by Burnham O. Campbell; Andrew Mason; Ernesto M. Pernia, The Journal of Asia
n Studies, Vol. 54, No. 2 (May, 1995), pp. 618-620 Political debate needs facts about the future
trends and consequences of different solutions
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04/19/2321
EXPECTATION OF LIFE AT BIRTH FROM THE SURVEY OF POPULATION CHANGE in Thailand
Year of Survey 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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04/19/2322
Source: http://thailandeconomy.blogspot.com/2007/12/thailands-demographic-window-of.html
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04/19/2323
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04/19/2324
Region 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
Southern Region 2,850.9 2,982.0 4,049.0
TOTAL FERTILITY RATES BY REGION in Thailand 1995-1996, 1991 AND 1985-1986
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04/19/2325
What This Means
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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04/19/2326
Compound interest rates factor
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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04/19/2327
Next Steps
Establish the necessary facts for the policy debate in Thailand
See e.g. the following literature http://www.ier.hit-u.ac.jp/pie/Japanese/discussionpaper/dp2003/dp201/text.pdf
Start a debate on the aims and scope of a public pension system