On December 15th, 2022, GIZ’s Sino-German Legal Cooperation Program conducted a workshop on how to design a fair and financially sustainable statutory pension system. On behalf of the Federal Ministry for Economic Cooperation and Development (BMZ), the workshop was jointly implemented with the Budget Affairs Commission (BAC) of the Standing Committee of the National People’s Congress of the PR China, which is usually in charge of important financial and economic policy legislative projects. Chinese participants came primarily from BAC’s own research department as well as from the Ministry of Human Resources and Social Security and the Ministry of Finance. Interest in the topic goes back to the Chinese government’s plan to further standardize the pension system through a reform, which simultaneously responds to the pressing challenges of demographic change. Experiences and “best practices” from Germany serve as an important reference point in this regard.
On the German side, the workshop was opened by Mr. Norbert Feige, legal advisor at GIZ in China. While Germany, as the birthplace of statutory pension insurance, has already been able to gather extensive experience, according to Mr. Feige, demographic changes are presenting both countries’ systems with similar challenges today. Precisely because the question of how social security can be guaranteed in old age without compromising intergenerational equity affects both countries, the topic was suitable for cross-border exchange. In his opening remarks, Mr. von Zhang Yongzhi, head of BAC’s research department, in turn thanked GIZ for its contribution to upholding Sino-German exchange on law and the rule of law throughout the pandemic. According to Zhang, the event came at a particularly good time for China, since comprehensive reforms of the pension system are pending and since the topic is also a focus of this year’s control work on government agencies. A central goal of the ongoing reform was to make social security in old age a central pillar of social stability and social cohesion in China.
In Germany, the system of statutory pension insurance is primarily geared towards maintaining a “reasonable standard of living” in old age. However, the appropriateness is not measured by objective needs, but by the relative income level of the insured person in working life. In what followed, Mr. Haker, Head of Department IVb2 for fundamental questions of old-age security, financing of pension insurance at the Federal Ministry of Labor and Social Affairs, provided participants with an insight into how exactly contributions and benefits are determined in Germany and how the long-term financing of the pension system is secured. Furthermore, his contribution revealed a shared feature of the Chinese and German pension systems: Their financing is based on a contribution principle, according to which today’s working generation finances the today’s pensions. By consequence, the following also applies to both countries: As in an aging society, fewer and fewer contributors have to pay for more and more pensioners, there exists the looming threat of a financing gap in the medium term. Either pension contributions will have to increase, pension benefits will have to be reduced, or the state closes the gap with tax money. According to Mr. Haker, Germany already reacted to the demographic challenge with a series of reforms in the 2000s. Here, the following stand out: (1) the “Riester” reform, which expanded state support for private pension insurance; (2) the introduction of a sustainability factor that automatically translates changes in the demographic structure to the pension system; and (3) the setting of so-called “double stop lines”, which place an upper limit on the contribution and a lower limit on the pension levels respectively. Whilst these reforms have recently led to greater stability in pensions than was widely expected, the full impact of demographic change would only unfold when the “baby boomers” retire in the years leading up to 2035 (see chart).
Despite the abovementioned financial stability of the pension system over the last years, the Federal Government has recently been expanding federal contributions to finance non-insurance-related but socio-politically desired benefits such as a basic pension for low earners as well as the remuneration of child-rearing periods. As the Federal Ministry of Finance is responsible for the respective federal grants, a second presentation by Dr. Elmar Dönnebrink, Head of Unit IA3 for Sustainability, Demography and Old Age Security, zoomed in on the mechanism through which Germany intends to ensure the long-term sustainability of the pension system. Accordingly, what is clear is that this cannot be achieved with federal budget funds alone, since the latter roughly correspond to the sum of pension benefits. And while the BMF expects net immigration to keep the population size in Germany roughly constant (see chart), the abovementioned departure of the baby boomers will likely lead to a decrease in the labor force of 1.6 to 4.8 million. To quantify the extent of the demographic challenge as objectively as possible and to identify the need for action early on, the BMF publishes a sustainability report every four years. Not least based on the resulting data, there are currently a number of reform projects in the pipeline, including (1) a reintroduction of funded elements; (2) a reorientation of subsidized private and company pension schemes in response to the low interest rate environment; and (3) assessing the potential of a public fund as a central instrument of private old-age provision.
The third and last presentation, by Prof. Gert Wagner, member of the Social Advisory Council of the Federal Government, followed seamlessly and offered Chinese participants an overview of the scientific debate on the German pension system. Accordingly, one question at the center of current debates is whether the retirement age should continue to rise from the current 67 years. On the one hand, this would put the financing on a more sustainable trajectory. On the other hand, low-income and educationally disadvantaged groups would suffer particularly, since they often do heavier physical work during their working life and are less in demand on the labor market in old age. What is more, various concepts for the reform of company and private old-age provision are currently being circulated. Although such a reform will indeed be necessary to maintain the standard of living if the pension level falls as expected, it also threatens to further increase social inequality in old age. To ensure that those who have earned below average during their working life will also enjoy a satisfactory income level after retirement, Prof. Wagner advised in favor of abandoning the strict principle of equivalence. With a view to particularly stark income differences, he also opined it to be advisable to look at the experiences of countries whose pension systems explicitly provide for redistribution, including Switzerland.,
In the discussion that followed, participants jointly discussed the differences, advantages, and disadvantages of different countries’ pension systems. Both in Germany and in China, for instance, the self-employed are rarely covered by statutory pension insurance. In both countries, the question of how to deal with irregularities and uncertainties regarding the monthly income of the self-employed thus arises when planning for a more comprehensive pension insurance. By contrast, in Switzerland all employees are insured in the statutory pension system. Whilst this contributes to a more balanced income level in old age, less redistribution is achieved in Switzerland through income tax. What this example illustrates, is that the reform of the pension system requires a holistic view of public budgets, taxes, and social security systems. It was widely agreed that each country must therefore make its own political goals and its own system the starting point for any reform consideration, rather than seeking to adopt aspects of other systems one-to-one.
At the same time, a more in-depth understanding of other countries can sharpen the view on one’s own system and provide food for thought for reform projects. Against this background, the participants variously voiced their interest in an ongoing exchange on the topic. GIZ’s legal program will continue to provide technical and organizational support to this end.