What the pension increase means for intergenerational equity

Photo by Jeff SheldonAfter a zero increase for pensioners this year, the consequences of the Corona crisis will now ensure a sharp rise in statutory pensions over the next two years: Senior citizens in the West can look forward to an increase of more than 10 percent by July 2023, while those in the East will see an increase of almost 12 percent. This is the result of new projections for the annual pension insurance report, the draft of which has now been completed by the Federal Ministry of Labor and submitted to the other ministries for internal government approval.

The main reason for the record-breaking increases now in prospect is the recovery of the labor market and wage trends after the heavy damper put on them by the Corona recession. That's because the two variables are key factors in calculating annual pension increases. This year, on the other hand, pensions should actually have fallen because of the decline in employment and wages in 2020. However, a special statutory rule, the pension guarantee, prohibits cuts and, at the most, allows zero increases.

Specifically, the new projections assume that seniors in the West will receive 5.2 percent more pension on July 1, 2022, and seniors in the East as much as 5.95 percent. Against the backdrop of the foreseeable economic trend, this increase had been expected for some time. However, it is all the more astonishing that the more than 20 million pensioners are now expected to receive similar increases in 2023.

In concrete terms, this would mean a further increase of 4.9 percent in the west and 5.7 percent in the east in July 2023. However, all the figures are still forecasts. The statistical data used by the government to calculate the actual level of pension adjustments on July 1 are not always available until March. With the current values, it would look for seniors with for example 1000 euro pension in such a way: The sum of both annual increments would be 102 euros more per month in the west and 116 euros in the east.

In addition to actual wage and employment developments, however, there are also special technical effects that amplify the fluctuations after the crisis. They also mean that the sharp increases in the next two years will probably be partially corrected in the next pension round: The ministry's draft even assumes another zero increase in the west and a small increase of 0.7 percent in the east for 2024 - although wages are expected to continue rising.

This is because pensions are ultimately supposed to follow the development of wages subject to contributions. However, since these specific data are only available with an even longer time lag, the annual increase is always first determined using aggregate wage data from the national accounts - and automatically readjusted in the following year if necessary. While there are otherwise only minor differences between the two data series, special Corona effects are now causing greater deviations and increasing the need for corrections. In particular, short-time allowances are not recorded as wages in the national accounts statistics, although pension contributions are payable on them. As a result, this mechanism amplifies the pension increase in 2023 and then automatically offsets it again in 2024.

Even without these pension mathematics, the upcoming sharp increases provide political discussion material - including for the coalition talks between the SPD, the Greens, and the FDP. That's because employers and liberal economists now see their criticism of a controversial decision by the black-red coalition strengthened and are calling for the "catch-up factor" abolished in 2018 to be reinstated.

"Pensions should not increase more than wages," Alexander Gunkel, representative of the employers' side at the head of the German pension insurance, summarized this view on Wednesday. Otherwise, he said, the stabilization of pension finances that is necessary for the long term will be made more difficult.The catch-up factor used to compensate for the pension guarantee in crises: If a cut that was actually necessary was not made, it was offset against later pension increases; otherwise, pensioners would become crisis profiteers, so to speak. If the new government were to reintroduce the catch-up factor, the pension increase for 2022 would be halved to a good 2.5 percent. Already on Monday, the former "Wirtschaftsweise" Lars field had pleaded for this step. The trade unionist at the head of the pension insurance, Anja Piel, however, advised against short-term interventions in the pension calculation.



Photo by Jeff Sheldon

 


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