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Jan 16, 2014

German pension reform to cost $90 billion by 2020

Changes benefit mothers, those who worked 45 years
By Holger Hansen
    
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BERLIN (Reuters) — Germany's planned pensions reform, one of the flagship policies of Chancellor Angela Merkel's new right-left coalition, will cost 60 billion euros ($89.3 billion Cdn) through to 2020, a draft law seen by Reuters shows.

The government wants to offer more generous pensions to some mothers and allow some people to retire earlier, which appears to run counter to Berlin's insistence on austerity during the euro zone crisis.

Merkel's conservatives and the centre-left Social Democrats (SPD) agreed to the plans in their November 'grand coalition' deal, reflecting the compromises the chancellor had to make to get the SPD on board.

However, Finance Minister Wolfgang Schaeuble has pushed for the more generous benefits to be funded via pension insurance, at least until 2017. He wants to avoid a greater burden on Germany's budget.

The draft law states that Germany's pension system has been stable and reliable and that raising the retirement age to 67 - a step introduced by a previous Merkel-led grand coalition, which governed from 2005 to 2009 - was necessary.

"However, we must look at those who started their working life when they were young and contributed to keeping the pension system stable through employment, independent activity and care such as raising children," states the draft.

Overall, the additional spending will amount to 4.4 billion euros this year, rising to 9 billion euros next year and 11 billion by 2030.

The draft law shows that the amount taken from tax revenues for the higher benefits will rise only from 2019.

Until then, the extra spending for mothers of children born before 1992 will come from pension insurance contingency funds and by employers and employees forgoing reductions in their contributions. This is the most costly part of the plans, amounting to additional spending of 6.7 billion euros ($10 billion Cdn) for full-year 2015, after which it will slightly decrease.

Contributions to pension insurance should remain stable at 18.9 per cent of gross wages and only rise in 2019 to 19.7 per cent, according to the draft law.

After taking into account the decision not to reduce contributions, as originally planned, the state will have to cough up about 1.5 billion euros a year more for the pension funds.

Some people will be allowed to retire at 63, four years before the legal retirement age, provided they have worked for 45 years without claiming unemployment benefit for more than a short time. This measure will initially cost 1.9 billion euros a year, rising to 3.1 billion euros in 2030.

People who were unemployed for a long time or who have claimed other social benefits are excluded from the new rules.

The draft law states that this is an isolated measure and restates the commitment to a retirement age of 67, which is being phased in between 2012 and 2030.

"Against the background of a deep demographic change, lifting the retirement age to 67 years is necessary to maintain the stability of pension insurance," states the draft.

"A retirement age of 63 years supports those who have done their bit .. through 45 years of contributions."

The new benefits are due to take effect from July 1.

Labour Minister Andrea Nahles, a Social Democrat, has sent the reform to other ministries for approval and the cabinet is due to give it the green light by the end of January.

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