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Photo Gallery: Despairing about the Golden Years

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Pension Armageddon Germans Fear Poverty Even After Life of Work

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.
Von SPIEGEL Staff

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.

Unmet Expectations

There is nothing new about the fact that statutory pensions are often insufficient to guarantee that retirees can maintain their standard of living. What is new, however, is that the pension system that politicians have encouraged Germans to embrace has reached a crisis point. Roughly a decade ago, when Germany's pension reformers reduced the benefits of the statutory system, they hoped that workers would fill the resulting gaps in their pensions by investing in private retirement funds.

But things often don't work out that way, as Werner Brochhausen, 68, and his wife Doris, 63, have found out. Brochhausen is a friendly pensioner with a warm and somewhat brittle voice. He used to be an engineer for Deutsche Telekom, the German telecommunications giant. His wife worked at the call center of Deutsche Bank, Germany's largest bank.

In 1997, the couple took out a life insurance policy with the Herold insurance company, which belonged to Deutsche Bank at the time, and is now a member of the Zurich Group. The product was called a "dynamic vario" policy, and it provided for funds to be disbursed if one of the policy holders died. The couple was told that they would receive some 210,000 deutsche marks if they paid their premiums for 15 years.

Over the course of the years, though, this amount continuously dwindled in the annual reports that they received from the company. In 2007, the couple could look forward to receiving just €85,016.59. Today, shortly before the policy will be paid out, it has dropped to €80,603.51. "That's less than what we paid in over all those years," Brochhausen says. "Now we know where the insurance companies get the money to build their palaces."

Chasing after Diminishing or Nonexistent Returns

Should the financial crisis continue, many small savers could find themselves in a similar situation. Indeed, the recent turbulence on the markets has been like an endless stress test for private-sector providers of old-age pension plans.

Nevertheless, the business relies on a simple enough principle: Customers pay their premiums, and the insurance companies invest the money in stocks and bonds.

But the yields obtained this way have been falling for years. The blame for this lies mainly with the central banks of the US and Europe, which have flooded the economy with cheap money over the past few years: In the euro zone, the key base lending rate has reached a record low of 0.75 percent.

That's good for German businesses, which receive loans at more favorable rates, but bad for savers. What they manage to put aside generates virtually no returns.

As a result, Torsten Utecht sometimes has great difficulties finding lucrative investments for his customers' money. Utecht, 43, hails from the western German town of Düren and, as the CFO of Generali Deutschland, he decides what is done with €106 billion of investment capital. According to industry regulations, fund managers like him have to invest this money according to stringent standards to help avoid losses for policy holders -- but that's no easy task.

It's not just the low interest rates that are making life difficult for Utecht and fellow players in the insurance business. Stock-market, real-estate and financial-market crises in recent decades have shaken the industry at its core. Which investments can actually still be viewed as "safe"?

After the 2003 collapse of Neue Markt, Germany's stock index for technology shares launched in 1997, many insurance companies hardly invested in stocks anymore. Instead, they purchased large quantities of bonds from banks and countries. Many of these securities were seen as the safest investments on the market, but the euro crisis rapidly put an end to that perception. Generali, for instance, had to write off hundreds of millions of euros in Greek sovereign bonds.

Bonds from debt-ridden countries, such as Italy and Spain, are now strictly off-limits for Utecht, but he is currently not purchasing any more German government bonds either, although they are still reputed to be completely reliable. The problem is that so many investors from around the globe are jostling to purchase them as a safe haven that the yields are no longer appealing.

Desperate for Returns

The Generali executive currently has some €5 billion in cash in the company's accounts. "That's 5 percent of our capital investments," he says. "Normally, it's 1 to 2 percent." Since this situation is untenable over the long-term, Utecht is looking for new investment opportunities. He's now buying more covered and corporate bonds, and looking into the possibility of expanding the company's lending operations.

Many of his colleagues are increasingly investing in real estate and solar panels. Allianz, the German insurance giant, has invested in parking meters in Chicago. Some insurance companies have even recently started buying asset-backed securities (ABS) from the banks, although these highly complex investments are only allowed to make up a tiny proportion of their portfolios. "If interest rates remain at their current level over the long term, bankruptcies cannot be ruled out," warns Lars Heermann from the Assekurata rating agency, which specializes in insurance companies.

In 2011, lawmakers even forced insurers to create a financial buffer to ensure that they can meet their indemnity commitments. These reserves will presumably have to be boosted once again by some €5 billion in 2012.

Investors will have to foot the bill for this. Indeed, the money for these guarantees will have to be deducted from the surpluses that make life insurance policies profitable in the first place. Although only some 4 percent of the savings accrued by an insurance policy are deposited in these emergency funds, the trend is toward greater amounts. This makes it less and less rewarding for many holders of life insurance policies and participants in Germany's "Riester" scheme, a voluntary, state-subsidized private pension program. With a Riester pension, says Axel Kleinlein, head of the German Insurance Holders Association (BdV), "you really have to have a large family to be sure that you can keep pace with inflation."

Kleinlein has calculated the impact of the new market situation on life insurance yields. The actuary's results are sobering: A 30-year-old man who signed a standard contract in 1992 for 35 years, and has since then been paying into it €150 a month, was led to expect nearly €199,000 in payout when the contract reached maturity (see graphic). In the meantime, however, the dividends paid by insurance companies have plummeted. Should they remain at their current level, the insurance policy holder, today age 50, can only count on receiving some €103,000 when the policy matures. If, after adjusting for inflation, the real interest rate drops to 3 percent, it would only be roughly €95,000. And if he is only paid the guaranteed amount, he will only receive €87,500. A 30-year-old who signs the same contract today can only count on receiving just under €70,000.

No Way Out

Terminating the contract is rarely a viable solution. For Claudia Klemm, 48, this radical decision only made her situation worse.

Klemm is divorced, has two children and owns a modestly successful bookstore in the heart of Berlin. The money is just enough to live on: Her average gross monthly income is €2,500. When she retires, she will -- at least according to the current calculations -- only receive €200 a month from the statutory pension fund. This would make her a candidate for supplements from basic social security. "Actually, I can only hope that I never get that old," says Klemm.

Nevertheless, for years now, the bookseller has been investing between €40 and €70 a month to boost her meager pension entitlements. At first, the money flowed into a life insurance policy, but since the annual reports revealed increasingly smaller yields, Klemm's investment consultant managed to convince her to cancel the contract. That cost her €4,000. The supposed financial expert assured Klemm that a stock fund would make up for the losses. His persuasive buzzwords included "global investments," "better opportunities" and "larger yields."

It was a disastrous decision. Klemm now realizes that "the funds are going down the drain." Her consultant now even admits that the situation can't be remedied. The most recent stock market turbulence has cost her yet another €4,500, and she's likely to suffer additional losses. "I'd almost be better off hiding the money at home," she angrily says.

Klemm is just one of the many people who lost substantial amounts of money after investing in securities and index funds over the past decade. Experts promised high yields and rising market prices but, in reality, investors could be happy if they didn't lose any money.

Losing by Investing

Nobody is more familiar with the dismal odds faced by investors than Andreas Beck, a mathematician who has his office in an attic loft of an old building in Munich. This is home to the Institute for Asset Accumulation (IVA), an asset-management service provider he founded. "Money no longer multiplies on its own," says Beck, who provides consulting services to banks in addition to insurance and investment companies.

According to his sobering calculations, anyone who is currently looking for a low-risk investment for their golden years -- in other words, primarily high-quality sovereign bonds and German Pfandbriefe, a class of covered bonds -- can at best expect a market return of some 3.1 percent.

That sounds respectable -- but, in reality, it's disastrous. Indeed, the investor will have to use these yields to pay for fees associated with the portfolio and withholding taxes on investment gains. Furthermore, inflation eats away at the value of the savings. The bottom line is that the investment loses over 1 percent of its purchasing power -- every year.

Consequently, making investments today often means that one can afford less tomorrow. If interest and inflation rates remain at today's level, the purchasing power of a €10,000 investment will melt away to just €6,730 within 30 years. By contrast, an individual who invested the same amount three decades ago will enjoy a purchasing power worth more than €18,000.

In the future, even risk-prone savers will only be able to dream of a comparable return on investment. According to Beck, after deducting various costs, taxes and for inflation, such a portfolio would only generate annual gains of 0.01 percent. This does not allow for anything more than maintaining the money's purchasing power -- even when taking considerable risks. "The young generation is the big loser in this development," says Beck, "and they can count themselves lucky if they can purchase as much with their money later on as they can today."

Politicians Scrambling for Solutions

Indeed, these developments have deeply shaken Germans' belief that they can spend their golden years living a life of prosperity. It used to be that Germans could be fairly certain that they would be better off in old age than during any other phase of their lives. Today, they have to worry that Germany will also experience conditions such as those in the US, where over one-fifth of the country's senior citizens live in poverty.

It's little wonder that the looming pension crisis has startled politicians in Berlin. German parties across the political spectrum are working on a new pension concept, but they haven't made much headway.

Minister of Labor and Social Affairs von der Leyen, for instance, has proposed increasing, under certain circumstances, the monthly pensions of retirees who have contributed to the system for many years to €850. But her so-called subsidy pension would help only very few employees and create new inequities because recipients would receive the same pensions even if they paid in different amounts over the years.

This week, members of the center-left Social Democratic Party (SPD) intend to debate a new pension concept that also aims to introduce a minimum pension of €850. But their plan would call for having government funds boost the amounts received by retired low-income workers.

It is primarily young social-affairs experts in the governing coalition, the SPD and the Green Party who are proposing that the current statutory pension, which is funded by social security contributions, be completely replaced by a basic pension financed with tax money. The concept has its advantages, but it would have to be set up so as to operate in parallel with the existing system during a decades-long transitional period.

The Only Solution: More Workers

Today's wage-earning generation cannot shoulder this kind of a dual burden, and both politicians and citizens must face up to a bitter reality: The problem of old-age poverty cannot be solved with just additional pension reforms, which merely redistribute the money between individual groups of wage-earners and retirees. Likewise, given the currently low yields on investments, expanding the private pension system wouldn't achieve much either.

Experts believe that anyone who wants to effectively combat old-age poverty must strengthen the very economic foundation of the pension system: employment. This entails ensuring that as many Germans as possible are gainfully employed, that they remain working for as long as possible and that they earn as much money as the country's economic development will allow. They also hold that those who have worked and earned good incomes should receive large pensions.

Germans will vote in federal elections in 2013. If their next government were to pursue a sweeping reform of the pension system, it would have to include the following elements: a program to promote the employment of women, a training offensive and a nationwide minimum wage. What's more, given the rising life expectancies in Germany, it will also be necessary to repeatedly raise the retirement age.

"The proposals made to date are purely quick-fix initiatives," says Axel Börsch-Supan , a Munich-based economist and long-standing government advisor. "The problem of old-age poverty cannot be combated within the pension system; it has to be solved on the labor market."

REPORT BY SVEN BÖLL, SEBASTION BRAUNS, MARKUS DETTMER, MICHAEL SAUGA AND ANNE SEITH

Translated from the German by Paul Cohen
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