Understanding the Risks Behind the CDU's Pension Reform Proposal

The ongoing demographic changes in Germany pose significant challenges, particularly concerning pension financing and the welfare of millions nearing retirement. Alarmingly, recent statistics reveal that 15.4% of women and 13.9% of men in Germany face the threat of old-age poverty, according to the Federal Statistical Office. The risk increases with age, with 20.6% of women aged 75 and older being at risk of poverty.

Many German retirees find themselves inadequately protected in their old age. A significant portion relies solely on the statutory pension scheme, which is a dangerous oversight. The German pension system operates on a three-pillar model comprising statutory, occupational, and private retirement savings. However, many individuals fail to diversify their retirement strategies.

A 2023 survey commissioned by the Association of German Banks (BdB) showed that only 41% of respondents over the age of 50 had private retirement savings, while 44% were covered by occupational pensions. The situation was even worse among those already retired: only 32% had an occupational pension, and a mere 15% had private savings. Over half of the respondents expressed a desire for increased state support for private retirement savings.

Prior to its dissolution, the Ampel coalition had initiated discussions on a reform proposal aimed at enhancing private retirement savings, which included the establishment of a state-supported retirement savings depot. This depot would allow individuals to receive government contributions based on their age and family situation.

With the coalition's collapse, these reform discussions have stalled, but the topic is expected to resurface after the upcoming elections. The CDU and CSU have proposed a similar initiative, yet the benefits would primarily target younger individuals. They plan to allocate EUR10 monthly into individual retirement savings depots for each child aged 6 to 18.

This initiative could amount to a total contribution of up to EUR1,560 from the government for young people, which, assuming an average annual interest rate of 5%, could grow to approximately EUR2,126 by the time the individual reaches 18. The CDU's vision for private retirement savings emphasizes that young people should continue to utilize these depots to accumulate savings until they reach retirement age.

However, key details regarding the payout structure remain undefined. The CDU has not clarified whether the funds will be disbursed in a lump sum or through monthly installments upon reaching retirement age. This aspect is crucial, as it could significantly impact the effectiveness of the proposed savings scheme.

A study published in October 2024 by the German Insurance Association (GDV) evaluated various payout plans for private retirement products. The GDV supports private pension plans that guarantee a lifelong income but acknowledges that these often come with higher costs. In contrast, a fixed capital payout plan may lack the security of lifelong payments, posing a risk of financial shortfalls if an individual lives longer than expected.

Many individuals tend to underestimate their life expectancy, which can result in their savings being depleted prematurely, potentially leading them into poverty during their later years. Therefore, the GDV study warns of a potential double burden on the state if individuals who have already received state-supported private retirement savings later require basic assistance.

The GDV report also highlights the absence of alternative plans for the funds in the event of premature death or if the insured individual does not live as long as anticipated. To address these concerns, the GDV recommends promoting retirement products that offer death benefits for beneficiaries, alleviating fears that individuals may lose their investment. Furthermore, it suggests delaying the start of lifelong pension payments until individuals reach age 75 to mitigate longevity risks.

Additionally, the GDV advocates for mandatory private retirement savings, a stance supported by the CDU in its fundamental program, though it is absent from their electoral platform. Such a requirement could substantially lower the risk of old-age poverty, provided that there is adequate state oversight to prevent exploitation through subpar or excessively costly retirement products.

Ultimately, the CDU's proposed retirement savings depot represents only one potential solution. Individuals considering this approach must accurately assess their life expectancy when planning for their retirement payouts. Given that women generally have longer life expectancies than men, they are particularly susceptible to the risks of financial shortfalls in later life. Ideally, individuals should strive to diversify their retirement strategies to enhance their financial security in old age.