Is the German state pension good value?

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Hi

 

I have been living and working in Germany for 10 years or so. I earn a decent salary and have contributed for those 10 years to the German state pension at what is the maximum levels. Before that i lived in the UK, and have about 15 years of National Insurance contributions.

 

I am thinking to move (back) to the UK, perhaps working for the same employer I have now. I am wondering if I should try to continue to pay state pension contributions in Germany (assuming that is legal/possible?) rather than (or in addition to) NI in the UK. I get an estimate from German state each year of my pension entitlement, and it seems much better return than that of a UK state pension. In "just" 10 years I have now earned almost the equivalent of a full UK state pension, albeit at higher cost to myself.

 

Comments/opinions?

CT

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I can't rightly comment on the status of the UK pension system- but Iwould seriously doubt that paying into the German public system longer than one is legally required to do so is a good deal (and I don''t think you can pay voluntary contributions from abroad if you are not a German citizen, either, to answer that part of your question).

 

What you have to undestand is this: unlike 401k in the USA or similar systems in other countries, in Germany your "claim" for pension is a theoretical one only. Because all your contributions do not build up a capital stock/account for your pension but are used to finance the pensions of today's pensioneers. Which means: the safety and volumn of your pension when you reach pension age is entirely dependent on how much the then working people in Germany can or want to contribute. The whole system is, when looking at the demograhic development, inherently instable and not sustainable anymore for the long run. Thus, these nice letters you are getting with estimated for pension are nothing but a look into a kind of chrystal ball and it takes but one legislative move to reduce your estimated pension drastically. Which is bound to come eventually in, say, 10-20 years because people will not agree to pay an even higher share of their salary anymore into public pensions and the only way out then is to reduce the pension payments. The first moves towards this happend in 2001 and at that time the RIESTER private pension plans where introduced to supplement the public pension cuts.

 

If you want to pay into some form of pension plan where the money is protected from your own hands as from third parties (in times of financial crisis it is worth considering that, too) like the public pension but where all the money paid in is definitly yours, start paying into a Basis/Rürup-pension and even turn some nice tax savings into pension claims while you are still lviing and working in Germany. You can contniue to pay into such a plan your entire life from anywhere in the world as long as you keep one German bank account. AS long as you stay in Germany a combination of Basis pension pln with an occupational disability insurance (if you have not done anything about income protection yet, it is high time) makes also a lot of sense tax wise.

 

Hope this helps you a bit,

 

Cheerio

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It you follow the media you will see some disasterous decisions that have recently been taken again by the German government in order to try win votes from pensioners in the coming elections. Employer/Employee contributions expected to rise in 2010 and 2011 by anywhere from 0,5 - 2% depending on which article you read. And many articles show the "real return" on investment you can expect to get from the state pension, which is not very high. For the younger generation it will be a negative return.

 

From personal experience I found the total tax burden in the UK to be much lower than in Germany. I would personally rather contribute the extra money not being paid in taxes in the UK into a private pension fund.

 

I worked in Germany for a number of years, but the pension system was one of the reasons that made me decide to rather change and work in Holland. The thought that I was "throwing away" 100s of EUROs each month that I will probably never see in my old age was disturbing. In Holland what you contribute is saved for yourself.

 

@Starshollow you would probably know a better answer than any of us, but the question that none of my German friends can answer is: How will the German State solve the problem ultimately with the current pension system. You can't just keep on raising the contributions that working people have to contribute indefinitely. And as the population continues to age more and more people will be claiming a pension, and fewer and fewer young people will be contributing into the system.

 

Also why did the system develop like this? Is is from the mentality that the state will look after one from cradle to grave? ie. Why did the country never have a private pension system?

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We had exactly this discussion yesterday. My thoughts were that either public pensions (as has already happened in the UK) and other social benefits like healthcare etc, will be drastically reduced, or that Germany would have to encourage the immigration of young workers on an enormous scale.

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I get an estimate from German state each year of my pension entitlement, and it seems much better return than that of a UK state pension. In "just" 10 years I have now earned almost the equivalent of a full UK state pension

I wonder if you are reading the notices correctly, or possibly misunderstood something:

 

AFAIK, after 10 year of maximum contributions, you should have "earned" an entitlement of roughly 500-600 € (monthly pension), if you stop contributing now. Which you will receive from age 67 onwards.

 

Is that really better than a "full UK state pension"? :unsure:

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How will the German State solve the problem ultimately with the current pension system. You can't just keep on raising the contributions that working people have to contribute indefinitely. And as the population continues to age more and more people will be claiming a pension, and fewer and fewer young people will be contributing into the system.

The way it is currently structured, there is a simple answer: The level of pensions will keep declining relative to the level of salaries.

 

In other words, while average nominal salaries will presumably keep rising at a 2-3 % annual rate, pensions will probably stay roughly flat, meaning their purchasing power will erode over time.

 

Based on such an approach, the system can be kept alive without raising contributions (or with raising them just a bit).

 

The obvious problem: 30 years down the road, the purchasing power of pensions will be far lower than what it is now.

 

(Oh, and of course this assumes that politicians don't tinker with the system. Which is probably an unrealistic assumption...)

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Also why did the system develop like this? ie. Why did the country never have a private pension system?

Most developed countries have a pension system that works roughly along those lines. Some smaller countries have shifted to contribution-based, and some other countries have reduced the social security pension entitlements to the bare-bone-minimum, but the conceptual framework in most major countries is not so different. Surely the UK pension system is not fully funded either?

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Tom a, but that is exactly my question. I hear what you are saying but that is still not a "solution" to the problem...that is what I meant by the younger generation getting a "negative return on investment".

 

Is there anyway they can sustain the system without dropping the level of payouts to future pensioners? I can't see any possible economic way it can function! I wonder if they can ever make a "cut-off" point where the system changes to a partial private pension fund system...doubt any politician has the balls to do this.

 

In Holland everyone contributes a flat amount to the state pension scheme and you will receive a flat amount from the state when you retire (e.g. EUR 300 per month), but the rest of your contribution goes into a private pension fund accrued in your name.

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Is there anyway they can sustain the system without dropping the level of payouts to future pensioners?

There can't be. Either pensions go down, or contributions go up. Unless there is a huge baby-boom starting next year, or half a million people immigrate to Germany per year (and manage to find decent jobs).

 

 

In Holland everyone contributes a flat amount to the state pension scheme and you will receive a flat amount from the state when you retire (e.g. EUR 300 per month), but the rest of your contribution goes into a private pension fund accrued in your name.

This is a big debate among economists right now.

 

In the UK, it is commonly refered to as "savings glut": If everyone keeps saving, there is no way all those savings can be channelled into useful investments. Small countries can do it. But if pay-as-you-go-schemes are abolished everywhere worldwide, I doubt that the world economy could cope with it. Unless there is a huge run-up in government debt to soak up all those savings.

 

Or to put it differently: Where would all those massive pension fund investments be invested?

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In Holland everyone contributes a flat amount to the state pension scheme and you will receive a flat amount from the state when you retire (e.g. EUR 300 per month)

Did some quick googling, and it appears that the Dutch state pension is close to 1,000 € if you worked all your life. Many German pensioners don't get more than that either. :unsure:

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But remember that is just the "basis pensioen" or basic pension from the state, on top of that you get your private pension as well.

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In principle, it's the same in Germany: Many companies offer corporate pensions. And you can always save on your own (with deferred taxation, just like 401K).

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I´m not the biggest fan of the public pension system myself but you have to keep in mind that it has proven itself to be quite stable. It has survived two World Wars, the hyper inflation and two currency reforms, after all. A lot of private investments certainly didn´t survive these shocks, after all. I guess that if you had asked some expert in 1920 if the public pension system were sustainable with our current demographics he would have ansered "no" as well. As Tom has already pointed out, at the end of the day the people who work have to support those who don't, irrespective of whether it is being done via an asset funded system or a pay as you go system.

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My German family don't consider their German state pensions to be good value - ie what they get out in return for what they put in. My (good) UK personal pensions at age 40 exceed their 40 years state provision actually in retirement. As others have said here, the "GB pension is lowest in Europe" line that we see in the UK press is misleading itself. It has to be set against the contribution made, which is also smaller. We get less because we pay less. You have to compare the ret

urn on investment, which is not just money doled out to oneself when living (widows' pension / benefit, more if married than single etc, etc).

 

Also, the "value" of UK NI is different for different groups. A single person's payment buys them less than the contributing half of a married couple with a non-working spouse gets. The beneifts are also much lower if you are employed. Employee's NI is along the lines of 11% of income, within a range, and covers not only pension but also sick pay, maternity pay and other stuff (ie. can easily be 2k a year if say 30k). So you can't actually identify an "employed" persion's pension contribution exactly, you are buying a bundle of stuff you might or might not need. By contrast, self-employed NI is a set weekly rate (just gone up to about 600 GBP a year I think) and that really just buys pension (way better value to anyone on a "standard" income who doesn't need to consider those other payments). Employed people are getting fleeced on that I think compared to self-employed, unemployed etc.

 

While not in the German system, I've also decided not to add to my (70%) UK state pension for the reason as given here, or at least I won't do it until much closer to the date. We can't take it as a given that we'll get what we are now told we will, if fact we almost certainly won't, it'll be later and perhaps smaller. Furthermore, the pension is just too small in scale to bother with. Nobody should hang their retirement hopes on the UK pension.

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I disagree with the statement that the 2 systems are similar.

 

In Germany I was forced to pay hundreds of Eur's per month into the state's "black hole". Certain professions like lawyers, Chartered Accountants (Wirtschaftspruefer) are exempt from having to contribute into the state system and have their own pension funds. However since I am an English Chartered Accountant and not a German one I had to pay into the state fund...no exemption. Now if I wanted to contribute to a private fund I would have had to pay in additionally on top of the money already being paid into the black hole.

 

In the Netherlands, in contrast, you are also forced to contribute to a pension fund on a monthly basis, but as already mentioned a small amount goes to the state pension fund, but the majority of your contribution goes to a private pension fund or if your company has an inhouse pension fund into the company's fund and benefits accrue in your name.

 

The way I see it is that the in the German system you are effectively "pi$$ing" away loads of money every month to fund a sinking ship. No capital stock is being built up, the system lives from hand to mouth, whereas when you contribute to a private fund they are building up a capital stock and hopefully investing the money wisely.

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I disagree with the statement that the 2 systems are similar.

They are similar in principle, but you are right that the Dutch system seems to put less emphasis on the unfunded state pension and more emphasis on the funded corporate pension.

 

 

No capital stock is being built up, the system lives from hand to mouth, whereas when you contribute to a private fund they are building up a capital stock and hopefully investing the money wisely.

Technically, the "capital stock" of the state pension is the earnings power of future generations that will be forced to contribute.

 

Whereas for funded pension, the "capital stock" is the future value of money invested somewhere. Possibly wisely, possibly badly.

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In practice, if you want the funded pension to be invested into "safe assets", they will probably end up in government bonds. Which are also backed by future taxation revenues.

 

If that happens, then the two systems are equally well "funded" (both rely on future tax/contribution payments made by future generations).

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Goeters, there is an extensive corporate pension system in Germany as well, funded by employers or employees with tax deductible contributions.

As tom has pointed out already, any asset funding of the pension systems of the major countries would involve fantastic sums of money. How are such sums to be invested reasonably?

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In the Netherlands, in contrast, you are also forced to contribute to a pension fund on a monthly basis, but as already mentioned a small amount goes to the state pension fund, but the majority of your contribution goes to a private pension fund or if your company has an inhouse pension fund into the company's fund and benefits accrue in your name.

Out of curiosity, can you tell us how much the contribution rate to the unfunded state pension is?

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Oblomov I am not denying that a corporate pension scheme exists in Germany. But any contribution into a corporate scheme in Germany is in addition to the forced contributions to the state scheme. So works out extremely expensive.

 

I am not sure if some of the posters on this forum are "selbstaendig" which would exempt them from the state pension system in Germany and give them the freedom to invest for their future as they see fit.

 

I realise that everybody has different personal circumstances, but feel the German system is not fair, you don't have a choice as to how the money will be invested and will ,at least as the current demographics stand, get out less than you put in. One could rather have put the monthly contributions you are forced to make into an interest bearing savings account and earn more than what you will get out of the state system.

 

I just think it is a demotivating system as it is currently set out...

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