Pension Armageddon: Germans Fear Poverty Even After Life of Work

By SPIEGEL Staff

For decades, Germans have been able to live out their golden years in comfort. For today's younger generations, however, the retirement dream is turning into a nightmare. Increased life expectancies, an aging population, low birth rates and vanished investment returns have many worrying about a future of poverty.

Photo Gallery: Despairing about the Golden Years Photos
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Jaime Aguilar loves his job. Every morning, when the 27-year-old German of Mexican origin wakes up the disabled youth who live in his group home in Stuttgart, he looks forward to yet another fulfilling day. "Whatever I give my boys, I get it back twofold," says the caregiver.

What Aguilar doesn't appreciate is the sight of his pay slip. Even back when he was in training, his instructor warned him: "You won't be able to live on your pension." Now he has read it in black and white in the newspaper. In 2052, when he retires after 40 years of working, based on his gross monthly income of €1,800 ($2,300), he will receive less than €590 a month in benefits. When he reaches retirement age, he will probably rely on payments from the welfare office -- and that makes him furious. "I don't want to have to struggle to survive," he says.

To avoid a life of poverty in old age, a coworker recently advised him to open a special savings account with a fixed interest rate. But Aguilar hasn't made up his mind yet. He needs the money to pay the rent, phone bills and his monthly public-transport pass. How is he supposed to cut back on these expenses? And, with everything that he has heard about the financial crisis, how much savings would he end up with anyway? "I can't trust the banks," he says "and I don't want to live on €5 a day."

The young caregiver is not the only worried worker in the country. Ever since German Minister of Labor and Social Affairs Ursula von der Leyen recently published alarming figures on the future level of German pensions, there has been widespread concern over the looming danger of old-age poverty.

Von der Leyen, a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), released data showing that, in two decades, the statutory pension will only be enough to guarantee a life on the edge of poverty, even for average earners. To make matters worse, what Germans have managed to save during the course of their working lives is in danger of evaporating in the chaos of the global financial and debt crises. Investment magazines and bank brochures warn of a "pension trap" and, in the insurance industry, there is talk of a "rude awakening."

Grim Figures

Germans are afraid that their dream of a golden retirement could turn into a nightmare. For decades, one of the certainties of life in Germany was that the next generation of retirees would be better off and live a more secure existence than the preceding one. It was viewed as a sign of economic success when Germany's senior citizens thronged the luxury decks of international cruise ships and were wooed by the advertising industry as an affluent consumer group. No other segment of the population currently has a lower risk of falling into poverty than pensioners.

But now even well-paid skilled workers and employees are afraid that this could change in the future. They see that the nation's falling birth rate has resulted in a dwindling number of employees who pay into state retirement funds. And they have noticed that inflation and low interest rates are eating away at their assets. Indeed, Thomas Meyer, the former chief economist at Deutsche Bank, recently wrote in the Frankfurter Allgemeine Sonntagszeitung that the effects of the crisis threaten to reduce the purchasing power of private pension plans by one-half.

Germans are growing increasingly anxious, and a growing number of politicians in Berlin are asking tough questions: How can Germans secure their later years as sources of retirement income decrease? What has to change in the retirement system? And, last but not least, how can the cost of covering the impending shortfall be fairly shared among contributors to state retirement funds and pensioners?

A monumental challenge must be tackled. Now that Germans are living longer, pensions also have to cover a longer period of time. Back in the 1960s, pensioners received retirement benefits for an average of 10 years. Today, a typical retirement lasts twice as long -- and there is nothing to indicate that the trend will reverse itself. On the contrary, advances in medicine, hygiene and nutrition only increase our life expectancy, and experts predict that this will continue at nearly the same rate in the years to come.

Most people welcome this as a remarkable achievement, but it spells bad news for private and state pension plans. Costs in the insurance industry are being driven up by a so-called "rising longevity risk." By 2060, it is anticipated that insurance companies will have to pay pensions to men for up to 25 years and to women for up to 27 years.

This increases the danger of rising poverty as the level of state pensions continues to drop. In a bid to cushion the impact of declining birth rates, various German governments have repeatedly amended the pension formula since the late 1990s and raised the legal retirement age to 67 years. As a result, the level of retirement payments will fall from 51 percent of the last net salary to 43 percent in 2030.

The Working Poor

For the time being, though, this development has forced relatively few senior citizens to eke out a subsistence-level existence. Only some 2 percent of the more than 20 million German pensioners currently rely on basic social security, which supplements low pensions. Better yet, anyone who goes into retirement these days can usually benefit from company pension plans or life insurance benefits, and anyone who has a traditional, regular employment situation, with a long-term and secure job, can still hope to receive an adequate pension in the future.

But it's another story altogether for workers in the so-called low-wage sector, which includes poorly paid seasonal work, bogus "self-employment" schemes and "mini-jobs," which allow people to work part-time and earn a limited amount of money without paying tax or social security contributions.

Angela Meinck lives in the northern German city of Hildesheim and has a varied work history. She studied art in Germany, took a management training course in Cairo and is now a certified nursing-care consultant and assistant. For years, the 46-year-old has been oscillating between long-term and short-term unemployment benefits, but she also legally earns money on the side.

At the moment, Meinck is keeping her head above water with mini-jobs, often for little more than €5 an hour, which is well below the standard union rate. Working for nonprofit organizations, she drives buses for the disabled and provides nursing-care consulting services. "When thing goes well, I work up to 40 hours a week and earn up to €900," Meinck says. But she also has little money left over at the end of the month. Not surprisingly, the most promising prediction that the pension office came up with for her later retirement was rather meager: €333.97 a month.

Back in 2007, the government pension agency published a study called "Old-Age Pensions in Germany," which is the largest evaluation of pension data ever conducted for Germans born between 1942 and 1961. The results were alarming. They clearly showed that old-age poverty is increasing. The reason for this trend is clear: The number of Germans in irregular work situations has risen dramatically since 1996, from over 6 million to more than 10 million. This includes roughly 3 million mini-jobbers along with some 5 million part-time workers who contribute relatively little to state pension funds -- and can expect to receive relatively little in return. It also includes a large proportion of the 2.5 million freelancers and independent contractors who employ no one but themselves.

In addition, there is a rising number of low-wage earners. There are now some 8 million German employees who work for an hourly wage of less than €9.15, as revealed by a study conducted by the Duisburg-based Institute for Work, Skills and Training (IAQ). Researchers found that 1.4 million employees even earned less than €5 an hour in Germany, which has no statutory federal minimum wage. Figures from the German government's new report on provisions for old age, to be published in November, show that of the roughly 25 million employees in the country between the ages of 25 and 65 who make social security contributions, more than 4.2 million earn a gross monthly salary of less than €1,500. This only entitles these individuals to the legally guaranteed basic social security.

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