ifo Institute: Majority of Economists Critical of Compromise on German Basic Pension and Its Financing
Many German economists are critical of the country’s new basic pension, which is designed to increase old-age pension provision and will, according to recent decisions, largely be financed by a financial transaction tax. This is the result of the current ifo and FAZ Economists Panel, a regular survey conducted by the ifo Institute, based in Munich, together with Frankfurter Allgemeine Zeitung among economics professors at German-speaking universities, in which 100 people participated.
“The pension package is counterproductive and at best useful for winning votes,” says ifo economist Niklas Potrafke. His ifo colleague Joachim Ragnitz, who coordinated the study, adds: “It benefits pensioners who don’t really need the money.” The cabinet decision of the CDU/CSU and SPD provides for an increase for all those who have paid into the pension fund for 35 years, raised children, or cared for relatives, but whose contributions deliver less than 80 percent of the entitlement of an average wage earner. Worth up to EUR 400 per month, the top-up pension is enough to lift income well above the basic pension. This redistributive measure should directly benefit 1.2–1.5 million pensioners.
However, many economists are critical of the fact that only an income assessment is now planned instead of a means test, as this means even wealthy people could receive a basic pension in the future. Of those responding to the survey, 56 percent consider this to be the wrong approach. Only 23 percent consider an income assessment to be sufficient, while 11 percent advise against any kind of assessment, e.g., because of concerns that it would create a bureaucratic monster.
Linking the amount of the basic pension less strongly to the amount of contributions paid is something a narrow absolute majority of participants considers wrong. Only one-third of participants are in favor of this approach, on the basis that, in their view, many pensioners would otherwise receive too small a pension. “The risk of increasing poverty in old age is often overestimated,” says Bochum-based finance academic Martin Werding, one of the survey’s coordinators. Although this risk does exist, in practical terms the basic pension ignores it completely. “Given how this new pension mixes insurance and redistribution, it’s likely that new injustices will arise, but it leaves the problem of rising poverty in old age largely unresolved,” Werding says.
Economists also feel there are many question marks hanging over the financing. “It’s not expedient to connect the basic pension with the financial transaction tax,” says Dominika Langenmayr, Chair of Economics and Public Finance at the Catholic University of Eichstätt-Ingolstadt. She points out that the fight against poverty in old age has nothing to do with taxation of the financial sector and should not be linked to it.
