Merz Administration Faces Economic Scrutiny Over Pension Reforms

As discussions surrounding pension reforms intensify, economic experts are expressing significant concerns regarding the plans proposed by the coalition of the Union and the SPD. The recently released coalition agreement under a potential Friedrich Merz administration has drawn criticism for its lack of clear financial strategies to support proposed changes.

According to the coalition's agreement, the pension level is set to be maintained at 48 percent until 2031, with provisions for increasing the Mütterrente and adjusting widow's pensions. However, doubts are emerging from both economic and political spheres regarding the feasibility of these commitments.

Marcel Fratzscher, the head of the German Institute for Economic Research (DIW), emphasized the need for comprehensive reforms in both pension and tax systems. He argued that a pension reform should aim to reduce the financial redistribution from younger to older generations and from lower to higher income groups. Fratzscher highlighted the necessity of raising the retirement age and moderating pension increases to alleviate the burden on younger taxpayers.

Moreover, Fratzscher called for immediate tax relief measures for both businesses and individuals with modest incomes, suggesting that such steps are critical to revitalizing the economy in the short term. He proposed that a fundamental tax reform should involve reducing the tax burden on labor through the elimination of subsidies and tax privileges, while increasing taxes on substantial wealth.

Monika Schnitzer, chair of the Council of Economic Experts, echoed similar sentiments, identifying the urgent need for structural reforms within the pension insurance system to limit increasing contribution rates. She also stressed the importance of initiatives aimed at preparing workers of all ages for ongoing structural changes within the labor market and attracting skilled labor from non-EU countries.

As the Ministry of Economic Affairs gears up to tackle these challenges, Schnitzer emphasized the importance of minimizing bureaucratic hurdles to facilitate the energy transition and foster a competitive environment. She indicated that fostering productivity-enhancing structural changes would be vital in reinvigorating the German economy.

Prior to the coalition agreement's unveiling, there had been a degree of optimism among economists regarding the government's plans. However, this optimism quickly turned to disappointment as the agreement failed to address necessary measures to control the rising expenditures in the pension sector. Steffen Kampeter, the chief executive of the Confederation of German Employers' Associations, expressed his discontent, pointing out that the coalition agreement lacked any significant efforts to curb spending growth in the pension system.

The agreement outlines several key points of focus, including:

• Stabilizing Pension Levels: The pension level will be maintained at 48 percent until 2031.
• Adjusting Mütterrente: The Mütterrente will be increased to three pension points for each child, irrespective of the child's birth year.
• Early Start Pension: For every child aged 6 to 18 enrolled in an educational institution, the government will contribute EUR10 monthly to a private retirement savings account.
• Active Pension: Pensioners who choose to continue working beyond the retirement age will receive a tax-free monthly allowance of EUR2,000.

With the pension contribution rate already on the brink of surpassing 20 percent, rising from the current 18.6 percent, stakeholders are concerned about the implications for employers and employees alike. This situation could lead to increased labor costs for businesses and reduced net income for workers.