In the US and Canada, pension funds have huge exposure to the equity market. As a consequence, pension entitlements are down sharply across the board.
Meanwhile, Germany's labor minister recently announced a 2009 pension hike of 2.7 % for West Germany (3.7 % for East Germany). Pensions are linked to the previous year's sum of all wages. 2008 was a good year for employees (Q4's GDP crash didn't immediately affect the labor market), the sum of wages was up sharply. It also helped that health insurance premiums were lowered.
However, 2009 is a different story: The number of jobs is declining. Millions of people are on temporarily reduced hours (Kurzarbeit). Wages are frozen in many companies, and sometimes cut. In short, it's quite likely that the sum of wages will decline compared to 2008. Not as much as nominal GDP, which will be down 5 % or so based on current projections. But decline it will.
According to today's Sueddeutsche Zeitung, researchers now project a decrease of 2.3 % (assumptions are not provided, but it doesn't sound implausible. Possibly a bit on the pessimistic side, but not by much). Olaf Scholz, the labor minister, disagrees: "The government's calculations" apparently indicate pensions can rise in 2010. Of course he didn't provide a concrete number, and he didn't share those mysterious "government calculations" with the press. And anyway, just to be on the safe side, he wants a law passed that makes it impossible for pensions to be cut. Ever. Other politicians dislike passing a law, but agree that pensions must not be cut.
I also think pensions should not be cut. If we anyway need fiscal stimuli for the economy, subsidising the pension system to avoid a cut probably counts among the most sensible measures with the least potential for "wasteful spending". Still, it's interesting how much such a measure would cost.
According to the Deutsche Rentenversicherung, the sum of contributions paid in 2008 was 179 bn €. The government added another 56 bn €. (Yes, that's right: Nearly 1/4 of all pension payments are not financed by contributions, but out of the government budget, i.e. the taxpayer! I didn't know it either, only learnt it just now. Imagine that: Germany is just starting to feel the effects of an ageing population, but the government already now pays 1/4 of the pension bill to keep pensioners happy! What will happen in 10 years, when the population is much older, and political pressure to keep pensions from eroding keeps going up?)
Let's assume the sum of wages drops by 2 % in 2009. As a consequence, the government would have to add 3.6 bn € in subsidies (on top of what it anyway pays) to keep inflows constant. After throwing in a few billion for extra expenditures in spite of constant individual pensions (the number of pensioners is going up, and health care costs are also rising), we probably end up around 6 bn €. That's 0.25 % of GDP. Hardly noticeable compared to the projected deficits, isn't it? (The fiscal deficit for 2009 will be at least 4 % of GDP = 100 bn €, quite possibly more.)
It doesn't look like much in absolute terms (hey - Deutsche Bank alone already lost more money than that in 2008!), and it is a sensible short-term measure. There's only one problem: Once you increase those subsidies, they will be next to impossible to undo. Ever.
(See also: Previous post on this subject)
Extended essay failing condition zero
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