ZEW President on Halving Pension Benefits for Childless Families

This piece appeared in the May 2003 edition of the ZEWnews.

Children

Since it is the responsibility of every generation to support their parents in old age and bring up children, and since childless families shirk the latter responsibility, it seems only fair to cut pay-as-you-go pension entitlements of childless households who are entitled to a full pension in half. This is, in a nutshell, the proposal made by ifo President Hans-Werner Sinn. As is to be expected from an economist with a strong reputation within the research community, his proposal is based on sound reasoning. But before policy-makers make it their mission to implement Sinn’s proposal, we must first outline some reservations regarding this policy.

This discussion leaves a rather unpleasant aftertaste, given that is frames having children as little more than a (financial) burden. Not a word is said regarding the joy that children bring to our lives, even though this is the main reason why people have children. Is there really anyone out there who would argue that their desire to start a family was first and foremost rooted in their concern over the stability of our pension system? But this argument will most likely be considered not “economic enough” or dismissed with reference to “external effects”.

Furthermore, it is underestimated how much childless households contribute financially to the costs of services that benefit parents or their children. For one thing, they pay into the statutory pension scheme, which involves a considerable redistribution in favour of families. Since 1992, the government has been granting three additional contribution years per child to parents for the time they spend raising children. According to the German pension authority, this has resulted in an increase in pension benefits, which currently corresponds to an additional 78 euros per month. What is more, the first ten years of child-rearing are recognised as qualifying years for a pension (“Kinderberücksichtigungszeit”), which increases pension entitlements even further. Finally, households with children who earn wages below the national average, due to part-time employment for instance, have been receiving an appreciation of pension benefits of up to 50 per cent since the pension reform in 2001.

With their tax payments, childless families also contribute to the financing of kindergartens, playgrounds, schools as well as universities (including financial support services such as BaföG and tax allowances for the parents of children in vocational training). Naturally, childless families do not receive child benefits nor tax-free child allowances; they are not granted family-related transfer payments from the federal government, states or municipalities. However, they help subsidise free insurance coverage for children as members of the statutory health insurance scheme. Childless households also receive reduced benefits when it comes to unemployment, social security or housing assistance. They also pay more, as families with children are granted discounts in municipal swimming pools, theatres or amusement parks – not to mention reduced ticket prices on public transport. Overall, government expenditure on social insurance schemes and family policy measures alone amounted to 160 billion euros in 2001. Childless families helped finance those measures – in many cases to a disproportionate degree.

What is certain is that the financial contributions of childless households may not be sufficient to qualify for a full pension, and as an additional measure, I recommend increasing the contributions of childless couples by eliminating the splitting of income taxation between married couples. However, financial contributions are not so unimportant that childless households should have to lose half of their pension entitlements. Finally, not all children will one day contribute to the pension scheme, be it because of unemployment or being unable to work due to disability, or because they choose to migrate to another country.