Fairness and Mothers' Pensions

For years now, there has been intense discussion in Germany about the financial problems facing the public pension system due to population aging. Fewer and fewer contributors are paying into the pensions of more and more retirees. To keep costs in check, the government has passed a series of reforms over the past two decades cutting pension benefits. One reform introduced a demographic factor to the pension formula. Another reform, passed by Germany’s previous grand coalition, provides for the standard retirement age to be increased gradually and reach 67 years in 2030. While pension contributions will rise in coming years, the reforms will slow the pace considerably.

The new federal government has embarked on a different strategy: extending pension benefits. Specifically, it has decided to allow employees who have paid into the public pension fund for at least 45 years to retire at 63 without penalty. It will also increase pensions for mothers of children born before 1992. Proponents of this policy U-turn argue that Germans can afford to pay these benefits given the state’s bulging pension coffers. What should we make of this argument?

It is true that, as favourable labour market trends in the past few years have increased contribution revenues, Germany’s public pension system has accumulated surplus funds. At the same time, the current demographic conditions in Germany are unique, and will not last long. A few years ago, people born during the Second World War and in the immediate postwar period – when German birth rates were low – began to reach retirement age. As a result, the number of new retirees has dropped, from around 1.4 million in 2003 to 1.2 million in 2012. In 2011 and 2012 alone, the public pension system realized a five-billion-euro surplus. But over the next couple of years this auspicious phase will pass and the system will begin to run deficits again, provided there is no increase in pension contributions. For this reason, it would be prudent to put away current surpluses for a rainy day. But politicians have so far been unable to resist the temptation to spend the money. The problem is that the surpluses are far from sufficient. The federal government estimates that mothers’ pensions alone will cost the government around 6.5 billion euros a year – quickly exhausting the reserve funds and leaving the lion’s share of the additional costs for future contributors to bear.

Fairness arguments have been used to defend current government’s strategy, particularly with regard to mothers’ pensions, where some have claimed that granting more pension benefits for children born after 1992 but not for those born before 1992 is arbitrary. It is easy to see their point. But what is more important is that those who have children and put much time and money into raising them maintain the pay-as-you-go pension, while pension contributors without children must rely on others. From this standpoint, it would be right to fund mothers’ pensions through cuts in pension benefits for people without children or to differentiate benefits generally by number of children. But politicians have lacked the courage to hold a debate about who should bear the costs for mothers’ pensions. Financing them by credit, and passing on the costs to the children of today’s beneficiaries, is not a convincing approach. It may offer the path of least political resistance, but it will not lead to a fairer distribution of benefits.