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Typically "Germanic"

Actor Johannes Heester died on Christmas Eve 2011 in Starnberg at the age of 108. In some ways, his story mirrors the challenges facing the German pension system and its retirees. Heesters spent 43 years in retirement, working almost to the very end.

If projections hold true, Heesters may not be all that unusual one day. The median life expectancy at birth in Germany is expected to increase from 80.6 today to 84.9 by 2050 (UNDP 2010) and researchers at the Max Planck Institute for Demographic Research in Rostock and the United Kingdom's Cambridge University believe that in 60 years, living to 100 will be the norm. An amazing evolution, indeed, but longer life expectancies would overstretch the pension system unless reforms are undertaken.

On average, Germans today spend almost as much time in the workforce as they do out of it. Entering at age 19, men can expect to spend an average of 16 years in retirement and women 22 years (OECD 2011).

Maximilian Zimmerer, Member of the Board of Management of Allianz SE

Germany is one of only a few European states to raise its legal retirement age above 65

Germany was the first nation to introduce old-age social insurance back in 1889 and the country has long been one of Western Europe's prime examples for a pension system dominated by the public pillar. To address the sustainability of its earnings-related, pay-as-you-go (PAYG) system In the face of severe demographic change, the German government has implemented several reforms and initiatives targeted at achieving a more balanced structure of old-age income and to keep its workforce employed longer.

In terms of the first (public) pillar pension system, the subsidized part-time employment scheme for older workers was withdrawn at the end of 2009. Beginning in 2012, the legal retirement age will gradually increase from 65 to 67 by 2029, making Germany one of only a few European states to raise its legal retirement age above 65; the others being Denmark, Norway, Italy (although with a very long horizon), Spain and the United Kingdom. Others as the Netherlands or Ireland are considering raising it above 65.

The pension retirees receive will also reduce in the future as it depends on a formula that includes adjustment for sustainability, which is negatively affected by the rising old age dependency ratio. This is expected to almost double from 30.8 to 56.5 by 2050 (UNDP 2010). Such a sustainability adjustment can be found elsewhere, as in the Japanese, Swedish and Finnish systems

To compensate for the shortfall in retirement income, the government introduced reforms in both the second (occupational) and third (private) pillars. These included subsidies and tax advantages that apply to both pillars and included the introduction of the Riester Rente, in 2002, and the Rürup Rente, in 2005.

Insurance has always been a prominent feature of the market and this remains true. Traditionally, the German occupational pension environment has been driven by life-insurance as well as pension commitments, for which companies build up reserves. Pensionskassen, a special type of life insurance sponsored by one or more companies, were one of the most popular pension provision vehicles.

The pension fund is a more return oriented system that allows both defined benefit plans as well as defined contribution plans with gurantees.

Germany has taken significant moves to confront its aging challenge and ensure the sustainability of its public pension system. However, how its citizens will actually fare in retirement will increasingly depend on occupational pensions and personal investments.

Longer working lives will play a key role. The German Council of Economic Experts already fears the increase of the legal retirement age to 67 is not enough and recommended an increase to 69 by 2060. Yet, further extending the retirement age will depend on the ability to retain elderly people within the workforce.

In 2000, only 56.4 percent persons aged 55-59 and 19.6 percent of those 60-64 were gainfully employed. The German Federal Ministry of Labor and Social Affairs (BMAS) launched several programs to promote more and better jobs for its older workers. The figures now stand at 71.5 percent and 41 percent respectively (Eurostat 2012) Initiatives that encourage life-long training and initiatives that aim to adapt work place conditions to elderly workers are slowly beginning to pick up momentum.

With an estimated 75 percent more people likely to be leaving the job market in the next decade than entering, there would seem many opportunities for the 65+ crowd in the future (OECD 2010). According to the Federal Employment Agency, 180,000 Germans between the ages of 65 and 74 took on some form of post-retirement employment in 2011. For many, it's a case of financial necessity. For others, like Heester, it may just be because they enjoy what they are doing.

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Udo Rössler

Allianz Deutschland AG
Phone +49.711.663-2220

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