Mittwoch, 24. Juni 2009

German Pensions

The OECD likes to do all sorts of international comparison studies, and preferably compares stuff that can't really be compared without endless caveats and footnotes. One of their latest studies tackles pensions in OECD countries (summary of results regarding Germany: here and here).

Some highlights:

Apparently, Germany's pensions for low-income earners are the lowest among all OECD countries (in % of previous salary).

So Germany has the lowest pensions among all OECD countries?

How can that be?

Especially as the report also notes that elderly Germans have one of the lowest poverty rates of all OECD countries (only 10 % of elderly are classified as "poor").

The answer, as far as I was able to figure out: The OECD doesn't actually look at current pensions, but at the pension a young person about to enter the labor force can expect when he retires. That's right: They are trying to compare pension payments to be made in 2050 and beyond.

I wonder: Can that approach make any sense whatsoever? Who can predict the various changes to pension legislation, economic performance, demographics and whatnot that will take place in the various countries over the next 40 years?

What's the point of comparing current legislation, considering that some countries (most notably Germany) have already legislated pension formulas that will provide for adequate pension reductions as the population ages, whereas other countries (Italy comes to mind) have so far refused to do any such thing, even though they are aging just as rapidly? No wonder that the OECD report shows very low future pensions for Germany and very high pensions for Italy. But Germany will face strong political pressure to "protect" pensioners by cutting pensions less (as we can already see right now), while Italy will be forced to make deep cuts or simply go bankrupt...

Lastly, the comparison doesn't take the standard pension age into account at all. Obviously, it differs from country to country, and it strongly affects pension entitlements.

We are also told that needy elderly people qualify for social assistance of 8,200 € per year (I assume this is Hartz IV + housing allowance). According to the OECD, this is only 19 % of average income, and lower than in most OECD countries (though the US and Japan provide even lower social assistance).

So Germany's social security net is also one of the weakest of all OECD countries?

Unfortunately, the statement is rather misleading:

If we calculate the average income based on 8,200 € assistance and 19 %, we arrive at 42,000 € annual income. Obviously, this is pre-tax and pre-social security (otherwise the number would be way too high as an average income figure).

Germany is a country with comparatively high deductions (as the OECD never ceases to remind us), so the social assistance figure would look better when compared to net income instead. Which would also make more sense, because living standard is determined by net income, not by pre-tax income.

Another snippet: Apparently, Germany has the highest penetration of voluntary private pensions schemes for lower and middle income households among all OECD countries. For upper middle class households, the US and the UK have a slightly higher penetration, but the difference is not big.

Not sure what that tells us, as there are all sorts of ways to save for retirement, including real estate, bank deposits and life insurance.

But still it's interesting, as certain politicians keep insisting there's a need for more financial incentives for private pension savings, because Germans are not signing up in sufficient numbers. Apparently, they are in fact signing up. At least compared to other OECD countries.

Kommentare:

  1. Very good article.

    In my opinion, it is all a matter of market timing. It does not matter if it is gold, oil, or Microsoft, if you have access to good market timing signals, they will help you get in and out at a profit.

    No guarantees in this business, but if they are right most of the time, you can still make $s.

    There are may web sites providing them out there (search Google). Just find one that works and use it! Check out http://invetrics.com as an example.

    Its Dow Jones timing signals are up 43% as of 6/23/09 while the Dow is up just 29% off its March lows.

    Following a market timing system works!

    AntwortenLöschen
  2. What a highly relevant comment!

    AntwortenLöschen
  3. "Apparently, Germany has the highest penetration of voluntary private pensions schemes for lower and middle income households among all OECD countries."

    I would guess this is due to the Riester Rente being a huge marketing success.

    AntwortenLöschen
  4. I suppose so. But should we be consider this an "achievement"? Considering that Riester is such a bureaucratic nightmare creating excessive admin costs...?

    AntwortenLöschen