The Next American Dream

German pension system showing age

Stephen Beard May 15, 2009
The Next American Dream

German pension system showing age

Stephen Beard May 15, 2009


TESS VIGELAND: Americans aren’t the only ones who dream of a day when they can stop working. And we wanted to get a sense of how other countries do it. Germans have long enjoyed the guarantee of a “government-backed” retirement. Marketplace’s European Bureau Chief Stephen Beard traveled to Bavaria to see if the grass is really any greener.

STEPHEN BEARD: Inside a Munich convention center, a dance-exercise instructor puts a dozen sprightly retirees through their paces.

The elderly dancers seem in excellent shape — both physically and financially. The venue is a giant expo aimed specifically at wealthy pensioners — a big market in Germany, says Karin Deckenbach of AWO, a nonprofit group that lobbies on behalf of seniors, among other groups.

KARIN DECKENBACH: Germans that are now 65 and older, they truly receive pensions that are certainly among the highest in the world.

Wolfgang, a 78-year-old former economist, is a case in point. He retired at the age of 60 on a company pension. He gets no retirement income from the state but has no complaints.

WOLFGANG: During the past 18 years since I’m retired, I have been at least twice every year to the States, to America. And I’ve travelled to the Far East. No, I cannot complain.

BEARD: You’ve had a pretty good time?

WOLFGANG: Yes, I have really.

Wolfgang’s pension amounts to two-thirds of his peak gross salary. And it adjusts annually for cost of living increases. He does pay taxes but also receives good, free health care under a government-sponsored program. With his savings and investments to fall back on, Wolfgang feels totally secure.

WOLFGANG: Most people would consider this sort of retirement where you have no worries. This is practically . . . you can hardly be topped. So, I consider myself fortunate.

Like the United States, Germany relies on a mix of public and private pension systems that pay out varying amounts based on income and money paid in. Wolfgang is in a small minority of Germans who depend exclusively on company or private pensions.

For most Germans, 80 percent of retirement income comes from the state. Workers typically pay into the public system about 10 percent of their pre-tax income for every year they’re on the job. Employers match their contributions.

By comparison, the workers in the United States typically pay 7.5 percent of pre-tax income into Social Security. Employers put in the same amount.

Karin Deckenbach says most Germans drawing state pensions are officially classified as “living comfortably.”

DECKENBACH: Once you retire, you in general get some 70 percent of your last net income before you retired. And then as a pensioner you don’t have to pay taxes on that. You have a special form of health insurance. So you’re pretty well off.

But expectations are high in Germany. It’s clear that many retired people who rely solely on the state pension do not feel well off.


“Am I satisfied?” asks this man. “No I am not.” He retired as an unskilled factory worker on a relatively low wage two years ago. He’s now 64 and receives about $15,000 a year, tax free from the state.

GERMAN MAN (TRANSLATION): It’s enough to get by on. I’m living in subsidized housing and the rent is very low. If I weren’t in a subsidised apartment, I’d have to go and get more from social security.

Germans on the whole do get more from the state pension system than American retirees, who receive about 40 percent of pre-retirement income from Social Security. Still, many here feel the government payments provide only subsistence living at best.

Otto Teufel is with ADG, a group campaigning for a big increase in the state pension.

OTTO TEUFEL: We want to have a fair pension. That we don’t have only rent, and some bread and some butter on it. We also want to have a little bit more.

BEARD: You want some jam?

TEUFEL: Yah. And some sausage on the bread.

He wants a 50 percent hike in the state pension so retirees can go to concerts and take regular vacations. It’s not going to happen, however. In fact, within a generation the state pension is likely to be cut by 50 percent.

Here’s the problem: As in the United States, the German public pension system is pay-as-you-go. Today’s workers are paying for today’s retirees. But the birth rate is declining and people are living longer. At the moment in Germany there are three workers supporting each retiree. Within 30 years it’ll be down to just one worker for every pensioner.

The government is now trying through tax breaks to encourage more people to take out private pensions. In a park in Munich I met this skilled factory worker. He’s 55, and he’s not looking forward to his retirement.

FACTORY WORKER (TRANSLATION): I don’t expect to be getting a lot. I’m not very confident. I have one of the new private pensions. Whether that will be sufficient. I have my doubts.

Although generally they can expect a more comfortable old age than Americans, Germans are notorious worriers. And they are certainly beginning to worry a lot more about their retirement.

In Munich, I’m Stephen Beard for Marketplace Money.

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