 Germany's pension system has a multi-pillar structure and relies increasingly on privately funded plans.
Its public pillar is not as generous or redistributive as is often claimed.
Germany's pension system was originally designed as a scaled premium
system. It formally became a pay-as-you-go system in 1957.
Participation in the system is mandatory for all dependent employees
and only some groups of self-employed.
The system is greatly fragmented in terms of institutions, coverage,
contributions, and benefit levels. In recent years, a big discrepancy
has emerged between the system dependency ratio (the relationship
between pensions and contributors) and the demographic old-age
dependency ratio. This has been caused by the use of early retirement
and disability pensions as a means of tackling high unemployment,
especially in Germany's five new states.
Except for the high incidence of early retirement and disability
pensions — and hence the low average retirement age — the system does
not suffer from the problems that have afflicted pension systems in
Southern and Eastern Europe and Latin America. Evasion seems not to be
a major problem.
The expected demographic aging poses a major challenge. There is little
if any room for increasing the contribution rate, so benefits will have
to be cut, most likely through an increase in the normal retirement age
and through tighter rules for disability pensions and early retirement.
The pension contribution rate is currently 19.2 percent of wages,
shared equally by employers and employees. The government covers about
23 percent of total spending — for benefits not directly related to
contributions. The break-even contribution rate of the system would be
closer to 25 percent.
Germany's system is not overly generous, compared with other OECD
countries. The average replacement rate (calculated as average insured
and windows' pension divided by average income) was only 36.3 percent
in 1993. This is about the same level as in the U.S. social security
system. The difference in contribution rates is explained by Germany's
much higher system dependency ratio.
Intragenerational redistribution in the pension system is quite
limited. Unlike such other countries as Switzerland and the United
States, Germany does not have a tilted benefit formula to redistribute
income from higher to lower income groups. Means-tested social
assistance is used to support the old poor.
 Monika Queisser
This paper — a product of the Financial Sector Development Department —
is part of a larger effort in the department to study pension systems
and contractual savings. Copies of the paper are available free from
the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact
Hedia Arbi, room G8-149, telephone 202-473-4663, fax 202-522-3198,
Internet address
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