The German state pension system is hemorrhaging red ink and needs emergency surgery. Labor Minister Norbert Blum thinks he has found a way to cut mammoth early retirement costs but he still has to get it past Parliament.
The problem is of the government's own making. In 1988, the government introduced massive early retirement benefits as a way to help companies shed costly older workers while providing jobs for younger employees.
It works like this: A company lays off workers, who receive unemployment benefits amounting to 60% of their last after-tax paycheck. The former employer adds another 30% of pay. The unemployment benefits could last up to 32 months. Once the ex-worker turns 60, he or she can claim early retirement benefits from the state system.
But the plan backfired. The 290,000 workers who took advantage of the program last year alone cost the state system some 66 billion deutsche marks ($45 billion) in pension and unemployment benefits; employers paid out another 5.5 billion marks ($3.75 billion). Meanwhile, unemployment has shot up to 10.8%.
"The government hoped companies would hire on more people with the money saved from axing the expensive older workers and thus reduce the unemployment rate," said Gerd Richter, country head and worldwide partner of William M. Mercer GmbH, Stuttgart.
"Not only did that not happen, they also underestimated the new costs incurred by the plan," he added.
Besides the payout of benefits, early retirees also stop paying into the state system - the result was an estimated shortfall of 10.4 billion marks ($7.1 billion) last year.
Mr. Blum has proposed a way to trim the burgeoning payments while still encouraging early retirements. He suggests allowing companies to reduce employees to part-time positions at age 55, with the government paying a supplement of 20% of the part-time wages. At age 60, the worker would receive a state pension, up to 40% to 45% of his early gross salary.
Some unions - like IG Metall, the metalworkers' union - worry the costs of reform will be borne by their members and argue for change to come slowly. But there is general agreement the huge sums of money going into early retirement benefits must be curbed.
Some companies, however, are turning to private ways to deal with the situation. Since 1995, employees have been allowed to set aside some of their pre-tax salary into flexible benefit plans. Employees can use the assets for various purposes, including retirement, health or vacation benefits.
"Service-oriented companies, particularly in the computer and software industry, have been most interested," Mr. Richter said. Both multinational corporations and German firms are interested, he said, but implementation has been slow because the concept is new in Germany.
Employees are being encouraged to put aside the assets for retirement as people are becoming aware of potential problems with the state retirement system.
International companies are more likely to adopt such plans because of their more varied experience because the concept is not as new to them as it is to the Germans, said Michael Freisberg, manager of employee benefit and actuarial services at Towers Perrin People Management Consulting in Frankfurt.