“Nobody ever explained to him how to grow money without being lied to and cheated.”

Anyone who works continuously as an employee with a steady income until the age of 67 can expect, once they retire in the not-too-distant future, to receive a net pension amounting to 50% of their final net income. For the average earner, this enables a dignified and self-determined life – as the German federal government puts it – at subsistence (basic income support) level.

Old-age poverty practically does not exist in this country

Anyone with a net total income of 760 euros or more per month is not considered absolutely poor; above 950 euros net they are no longer considered relatively poor; and with more than 1,150 euros they are no longer considered at risk of poverty. Where the income is lower, the Deutsche Rentenversicherung (German statutory pension insurance) recommends checking whether there is an entitlement to basic income support pension. This includes all benefits that are also paid under social assistance. Old-age poverty appears conceivable to the legislator only where, by mistake, no application for basic income support pension has been filed. The support includes 382 euros for the living needs of a single person in their own household. Spouses and registered partners receive less (345 euros) and adult household members even less (306 euros), plus the warm rent (rent including heating) for suitable accommodation – for a single person, that means a single room.

A reduction occurs where the rental costs are too high, forcing a move. Some municipalities even pay the estate agent to find a flat beyond the municipal boundary. In the past they also paid for a third-class ticket to America on the Titanic, or for sewing and cooking training followed by a journey to German South-West Africa with the Woermann Line, with secure marriage prospects. A different matter is the offsetting of all income, including income from Riester pensions. However, the single person must first use up their own assets until no more than an exempt amount (protected assets) of 2,600 euros remains. Poverty would thus, in principle, be conceivable where the employment office cuts the subsistence minimum – as a sanction, for example for refusing retraining – by up to 30%. After all, even someone who has completed an academic degree can hardly avoid, in the event of subsequent unemployment, retraining as a welder, work as a temporary labourer in the asparagus fields, or other precarious employment.

The statutory pension is “secure”

Anyone who currently receives their personal pension statement is shown a pension level that assumes a consistently average-level employment income, continuously until the start of the pension at the future age of 67. Over the coming years, the level of the pension will, by the legislator’s intention, be further reduced by 12%. A further reduction occurs because only a basic tax-free allowance of 8,354 euros is exempt from income tax and the solidarity surcharge, so that up to 15% in tax deductions further reduces the future fully taxable pension. Added to this are deductions of more than 10% for social security contributions, such as statutory health insurance. The so-called benchmark pensioner (Eckrentner) with average income is currently shown pensions of 1,266 euros per month after 45 years – in reality, in the future they may only count on around 950 euros net in real terms, that is, a quarter less. Employees with average incomes of even more than 30,000 euros gross annual salary thus also have the best prospects of a life without old-age poverty, that is, at subsistence level.

Pension statements are burdened with deductions of more than 42%

Current surveys show that it is precisely the younger people and those earning only up to average who, with respect to taxation and to the level of their expected net pension relative to their net income, are over 90% completely clueless – and therefore also have no idea how large the gap in old age will be. Of those surveyed with a net income below 2,300 euros, only 4% were even aware that the pension is taxed. The annual pension statements appear so incomplete that those insured under the pension scheme are not even approximately properly informed.

Illusions about the income actually available in the end

Only 2% of the working population can correctly state that, at today’s pension start, 68% of it would be taxable, rising annually to 100% from the year 2040. Almost no one knows that pension increases are always fully taxable. Only 38% of those surveyed can correctly assess the pension level – for example, that today’s 20- to 34-year-olds can on average receive around 38%, whereas the 50- to 65-year-olds can still receive around 51% of their final net salary. For the latter group, too, future pension increases will not offset purchasing power, so that these pensions also lag behind wage developments in real terms and become worth less and less, until they too move ever closer to the poverty line.

The majority of employees believe they have made sufficient provision – and this despite ignorance about their personal pension level, in particular a further reduction of more than 25% in the net pension level compared with those currently retiring. But people probably do not want to tell them this too clearly, so as not to deprive them of the hope of being able to close the pension gap through private provision. From the state’s point of view, it is sufficient if the additional provision does not secure the standard of living but at least spares the taxpayer from having to top it up to subsistence level.

For around 15 years, productivity in the economy has risen without employees being meaningfully involved in it – and contributions to the pension insurance remained correspondingly low. In addition, pensions were decoupled from wage increases, so that pension adjustments reflected wage developments only in a reduced manner. The future gap between pension and earned income is widening, which is, however, not apparent from the state pension statement. One might wrongly believe this is already accounted for in the figures communicated, which is not the case.

Unscheduled reductions at occupational pension chambers and pension funds

Pension funds (Versorgungswerke) as recipients of compulsory contributions, and pension institutions as recipients of voluntary contributions for supplementary provision, regard themselves as professional, predominantly funded pension institutions in the form of legal persons under public law.

The competent state ministries may reduce the pension benefits by order where the contribution income, capital and its returns are no longer sufficient to finance them. Usually this is established by the audit office or by an actuarial expert opinion, for example where the permanent fulfilment of obligations, the formation of adequate technical provisions, investment in suitable assets, and solvency are in question.

The supervisory authority will counter insolvency and the intervention of the state’s statutory guarantor liability by replacing outdated mortality tables, lowering calculation interest rates, and cutting benefits and entitlements. This is permissibly carried out within the framework of so-called abuse supervision, § 81 VAG (German Insurance Supervision Act), as most recently confirmed by the Administrative Court of Munich in its judgment of 11 May 2009 (Case No. M 3 K 07.5934). Reductions amounting to more than 50% have already been observed.

Retirement provision from the perspective of an asset manager

The dentist Dr Schaum has just learned that the speculations of his pension chamber (for example in the subprime crisis, but also in the Greek and Cypriot crises) as well as tax changes have halved his prospects of an old-age pension, and at first he consoles himself, because it could have turned out even worse. And so it does, when it is explained to him that the persistently low interest rates in Europe are likely to reduce the pension level by a further third on top. He had not reckoned with a basic income support pension. No, that cannot possibly be right – he turns to an actuarial expert and is disillusioned: “If, instead of the 3,000 euros I was led to expect, I can now hope for around 1,000 euros pension at best, then I have to work until the end of my life?”

He then meets an independent asset manager with knowledge of economics. “Well, if you had invested a total of 250,000 euros with me over more than 20 years, instead of paying it in as compulsory contributions to your pension chamber, then today you would already have assets of over 1 million euros – simply through skilful handling of the German share index (DAX). Instead of the expected 1,000 euros, you would then perhaps receive a modest 3,000 euros monthly pension from dividends – and, by drawing down capital, more than 5,000 euros, month after month.”

Dr Schaum is at a loss – nobody ever explained to him how to grow money without being lied to and cheated. By comparison, he has so far lost more than half a million through “supplementary provision” alone, for example closed-end participations, profit-participation rights, and private life insurance policies. Every adviser and intermediary carried “the cream of the crop” in his bag, and turned out to be a disappointment.

The asset manager does the maths: you preferred to pay 120,000 euros in commissions, which had been concealed from you, rather than 40,000 euros for independent advice. This 80,000 euros in additional outlay alone, invested at 5% interest, would have yielded half a million more by the start of your pension. “In the end, this decision has so far cost you the small difference between 1,000 euros and more than 5,000 euros as a pension prospect.”

by Dr Johannes Fiala and Dipl.-Math. Peter A. Schramm

by kind permission of

www.network-karriere.com, published in issue 04.2024 on pages 22 and 23