The federal government has published proposed reforms for financing the state pension system, the “Pension Package II” (Rentenpaket II). The proposal aims to maintain the targeted level of state pension benefits and to limit longer-term increases in employer and employee contributions to the system, in the context of an aging population and increasing expenditures on pensions. The proposal is centered on establishing a long-term sovereign wealth fund to generate funding for the state pension system.
Following are main elements of the Pension Package II:
Reform of the state pension system has been on the government’s agenda for over two and a half years, delayed by disagreements within the coalition government on how best to ensure the system’s sustainability. Opposition to the proposed reforms is based in part on the higher contribution requirements and the uncertainty of relying on investment returns to provide funding consistently at the level projected. In addition, the projected €10 billion of annual funding from Generations Capital to the pension system would be modest relative even to the current level of state pensions in payment (about €300 billion in 2023), let alone future payments. Employers should monitor the progress of the reforms and evaluate how the continuation of the 48% targeted income replacement rate for state retirement benefits affects the attractiveness of supplemental pension plans offered to employees.
