Dateline Germany: Why Pension Reform Is Key to Stabilizing Democracy

In the German political debate, a great deal of attention has been paid in recent years to the issue of dealing with climate change.

Even if the commitment to tackling this issue has waned somewhat recently, environmental policy continues to be a big focus in the national debate.

The political irresponsibility of “nice-to-haves”

This makes it all the more surprising that the massive demographic challenge facing Germany is basically met with a great deal of indifference in the political debate.

Instead of focusing on tackling this challenge honestly and forthrightly, the opposite is happening. The welfare state is expanded even further with what at best are “nice-to-haves,” such as making special payments to mothers’ pensions.

Future pension levels are fixed irrespective of whether there are enough contributions paid into the German social security system.

And new proposals to extend care benefits are presented almost daily, even though it should be clear that the available financing has long been exhausted, and that the burden on contributors will increase dramatically.

Where are the protests from the young generation?

What is most astonishing about all this is that young people have not yet rebelled, organized themselves and gone on strike.

A few facts: Germany’s public spending ratio already exceeds 50% of GDP. Social security contributions by employees and employers are higher than ever, at around 42% of gross income.

The 50% threshold is likely to be reached in the 2030s when the baby boomers reach retirement age.

Non-wage labor costs will therefore continue to rise. This makes labor more expensive and slows down the creation of new jobs.

Lest we forget, it is the private sector that generates the tax revenue and social security contributions that keep the state afloat. The welfare state is therefore in danger of destroying its own foundations.

The inconvenient truth

Ultimately, financing the welfare state is always about other people’s money. It is the contributors and taxpayers who have to pay for what politicians facilely offer as election gifts to individual groups such as pensioners.

This undeniable fiscal reality is often concealed by claiming that whatever the problem may be, it can easily be solved by just having “the wealthy” pay more into the system or including civil servants to finance it.

But that would only buy a little time, because the problem is much bigger than that. Including new groups would exacerbate the problems, because in the future even more benefit recipients would have to be supported by fewer and fewer contributors.

The new government’s cop-out

The new German government led by Friedrich Merz has established a commission that is supposed to come up with proposals for reforms by 2027.

That is little more than a gimmick. After all, there have already been plenty of such working groups. Politicians have mostly ignored their advice.

The levers needed to stabilize the welfare state — and with it our economic order and growth potential — have long been known. Why wait for the next commission? Every year that is lost makes it more difficult to change course.

Undermining democracy

Many citizens are aware of this. They are rightfully irritated by politicians’ self-serving, but misleading claims along the lines of “We can do it!” or — more preposterous yet — “Pensions are safe!”

This is playing with fire. Any further political procrastination in tackling the problem undermines support for democracy.

But instead of talking about concrete reforms, politicians are getting bogged down in debates about small steps such as the abolition of a public holiday or two.

The other tipping point

As with climate change, there is a tipping point in demographic change beyond which all reforms are useless. Why? Because growth collapses and tax and contribution revenues plummet. Then all pension promises will be broken anyway.

That is why any reform must start with the younger generation: How much of a burden can they be expected to bear? What will older people have to give up?

There is no way around accepting longer working lives, adjusting pensions only to purchasing power and other painful, but economically fair and justified changes.

That is probably why most people prefer to talk about the weather (or cutting public holidays) rather than the climate (or tackling pension reform).

Editor’s note: This feature was adapted from a commentary by the author that originally appeared in Germany’s Börsenzeitung.