August 19, 2016

Germans may have to work until they are 69

Bundesbank, Germany’s central bank, recommends raising the country’s retirement age to 69 by 2060, believing that otherwise Germany may struggle to honor its pension commitments.

Although the state pension system is currently in good financial health, it will come under pressure in coming decades from an aging population.

The retirement age for Germans is already set to rise gradually to 67 by 2030, but the bank feels that from 2050 this increase is unlikely to be enough for the German government to keep state pensions at their target level of at least 43% of the average income. It therefore proposes pushing the retirement age up to 69.

However, whilst Bundesbank believes that further changes are unavoidable, the government has no plans to deviate from its current plans.

Marek Góra has written about pensions systems for IZA World of Labor. He stresses that “[p]ension systems need to be redesigned to accommodate demographic changes.” Góra says that “[p]ostponing adjustment simply increases the economic and social costs. The interests of workers (wages) and retirees (benefits) differ. Governments need to make pension systems more transparent and make adjustments to reduce the burden on workers, returning pension systems to a social role.”

An alternative solution to the challenges of unemployment, aging populations, and public pension burdens is offered by Carol Graham in her article about late-life work and well-being: flexible retirement. Graham feels that given the increase in labor-saving technology and aging populations, more creative solutions are necessary. She notes that “[w]hile the potential transaction costs of such arrangements, as well as their feasibility in more precarious labor markets, are concerns, policies that support more flexible labor market arrangements, including incentives for job-sharing and remaining in the labor force after retirement age, can help overcome these problems.”

Related articles:
Redesigning pension systems, by Marek Góra
Late-life work and well-being, by Carol Graham
The incentive effects of minimum pensions, by Sergi Jiménez-Martín
Pensions, informality, and the emerging middle class, by Angel Melguizo
Pension reform and couples’ joint retirement decisions, by Laura Hospido