ifo Institute: Basic Pension in Germany Not Suitable for Combating Poverty in Old Age

Ragnitz explains that the benefit of such a pension would be at best marginal to pensioners who are dependent on Germany’s “basic old-age provision” because of their low income in old age. Indeed, in many cases even this increased pension would not exceed the EUR 808 “basic old-age provision” set by the welfare agency. Moreover, pensioners are entitled to claim the basic provision only after 35 “basic pension years,” which rules out most of the needy. In addition, under the present plans, periods of unemployment or employment in a mini-job would not give rise to any entitlement to a basic pension. “The planned reform is a move away from the principle of insurance towards a policy of redistribution,” Ragnitz says.    

Even a means test, as demanded by the CDU, would do nothing to make the basic pension more effective as a way to combat poverty in old age. “Pensioners in need are most likely to benefit from the introduction of a tax-free allowance to the basic old-age provision. They stand to gain next to nothing from a basic pension,” Ragnitz continues. In contrast to the plans of the German Federal Ministry of Social Affairs, however, in Ragnitz’s opinion this tax-free allowance should be based on the additional income rules for Germany’s second level of unemployment benefits (Arbeitslosengeld II), i.e., it should increase in line with original pension income.  “Otherwise, the problem will remain that a person’s higher pension entitlements will almost never be reflected in an increase in income,” Ragnitz says.