Sunday, January 31, 2016

Are we saving enough for retirement: Germany

In Germany the answer appears to be Maybe.

There are three pillars to the German retirement system; 1) the government-run Retirement Insurance system, 2) private company plans and 3) private individual retirement investments.

The Public Retirement Insurance System, which also includes survivor and disability benefits, has been dominant. Participation is mandatory for employees, with each worker assessed for a sum based on annual earnings. Premiums are deducted by the employer, with the employee paying half and the employer half. 

In 2015 the premium is 18.7 percent of the gross monthly wage or salary. This is assessed on monthly incomes up to a maximum of 6,050 euros (72,600 euros a year) in the west and 5,200 euros (62,400 euros a year) in the east. 

Retirement now normally begins at age 65, though it is to be gradually increased to 67. Contributions to the plan are also to be increased, and maximum pensions eventually reduced from 70% to 67% of net pay. English language information about the German Public Retirement System can be found at (Click on "International" on the top right of the page.)

Company Plans (bAV betriebliche Altersvorsorge) have traditionally been designed to supplement Retirement Insurance, and now will play a greater role in taking up the slack. Government tax breaks and subsidies will encourage companies and employees to invest in private plans. Though company plans are not compulsory, they cover about three-fifths of the working population, a percentage that is expected to grow. Pensions on company plans usually also commence at age 65, though this is likely in many cases to follow the Retirement Insurance practice and increase gradually to 67.

The third pillar, individual retirement investments, have not been very significant up to now, but have recently been getting a lot of attention as supplements to the Public Retirement Insurance. These private plans include (but are not limited to) the Riester and Rürup plans. Workers and other participants can get certain tax advantages and benefits from government subsidies for these plans. The benefits and other details vary from plan to plan. There are differing payment methods, payout schemes, tax liabilities, portability opportunities and other factors that distinguish these plans from each other. Certain plans may be better for different individuals depending on their particular situation.

Germany’s retirement system is generous for many, but getting less so. The post-World War II economic boom financed comfortable retirements. The system still provides the bulk of income for retired people — about 70 per cent as of 2010. Germans can retire with a full pension at 65, though the age is gradually rising. People born after 1964 face a retirement age of 67.

The system replaces 58 per cent of average take-home pay. The pensions are funded by a payroll tax with no investment assets backing the government’s promises — a so-called pay-as-you-go system. Pensions are tied to earnings during a person’s working years. However, the formula now reduces pension levels as the ratio of retirees to workers rises. An additional benefit serves as a safety net for very low-income retirees. Many people who work for major employers also have company-based pensions.

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."

Back in 2007, the government pension agency published a study called "Old-Age Pensions in Germany (PDF File)," 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. Source

Pension reforms in 2001 and 2004 have changed the character of the German pension system and shifted more responsibility to the individual. This has resulted in a lack of confidence
Compared to the global average of 82 percent, Germans, Australians, Britons, and Americans are the most optimistic with  66 percent, 65 percent, 69 percent and 70 percent of respondents respectively who say they are worried about their financial situation after retirement. South Koreans (95 percent), Mexicans (92 percent), Russians (92 percent) and Spanish (91 percent) are the most pessimistic

Much of Europe has a lack of confidence that their retirement programs will be in place when they retire. In some places the confidence has seemingly collapsed: only 11% of German employees are confident they will enjoy a comfortable retirement, which in Poland falls further to just 4%. While western Europe may have some of the best developed retirement systems in the world, confidence that these systems will still be in place for future generations seems to be rapidly eroding.

Only 15% of German workers have a plan for retirement that is written down, 47% say they have a plan but it is not written down, while 39% do not have a plan or have not thought about retirement.

In Germany more workers are saving enough for retirement however, there are some compelling reasons why some people are not preparing adequately for a comfortable retirement:

Did not start saving early enough
Globally, almost two in five working age people (38%) and the same number of retirees (38%) admit they did not start saving for their retirement early enough. This is a key reason for over half of working age people in the UAE (55%), Brazil (54%), Indonesia (52%), and India (52%), and for around half of retirees in the USA (51%) and Australia (48%).

Cannot afford it
Lack of affordability was also the main reason cited by retirees for inadequate preparation  for retirement. Over a third (35%) of working age people and a quarter (26%) of retirees around the world say they cannot afford to prepare adequately for retirement. Around half of working age people in the UK (52%), France (52%), USA (51%), Australia (45%) and Canada (44%) say that lack of affordability is why they are not preparing adequately.

Were not aware of how much to save
More than one in five (22%) of working age people and three in ten (29%) retirees globally say they did not know how much they needed to save for a comfortable retirement. This rises to 41% of retirees in the USA and 39% in Singapore.

Paying off a mortgage or other debts
Mortgage repayments are a barrier to preparing for a comfortable retirement. More than half  say that paying off their mortgage is preventing them from adequately preparing for retirement, with those in Singapore (41%), Malaysia (38%), Australia (35%) and the UK (30%) being the next most affected. Mortgage repayments were much less of a barrier to preparing for a comfortable retirement for retirees (9%).

Paying off other debts
Around the world, almost a third (32%) of working age people say they cannot prepare adequately for a comfortable retirement because they are paying off other debts. This is a particular barrier for pre-retirees in the USA (51%), Malaysia (49%), Mexico (41%), and Canada (41%). However just 16% of retirees say debt repayment was a barrier to preparing for a comfortable retirement.

Another factor which prevent saving for retirement is:
The economic downturn has significantly influenced the ability of working age people to save for retirement.  For example in France, (38%) say the economic turn down of 2008-2009 is still affecting them, while the turndown of 2015-16 is hurting all of us.

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