20 Years of the Riester Pension - Germany Needs a Reform of Private Retirement Provision

By Johannes Geyer, Markus M. Grabka, and Peter Haan

The German Federal Government introduced the Riester pension in 2002 with the goal of subsidizing personal retirement provision with grants and tax benefits. Twenty years later, the goals of the Riester pension remain unachieved and valuable time for reform wasted. The Riester pension was originally conceived to function as an essential component of the retirement provision system, but these high expectations were not fulfilled. According to SOEP, which includes information about private pensions, only around 25 percent of the working-age population has a Riester contract. Without four billion euros of government funding per year, use would be markedly lower.

The SOEP data show familiar patterns of insurance markets. People with higher incomes and a higher level of education have easier access to this market and take out pension contracts more frequently, in part due to tax deductibility, which is more attractive for higher incomes. The reverse is true for people with long periods of unemployment, a low level of education, and low income. Although they benefit from government support in particular, they are much less likely to have taken out Riester contracts and, thus, only a small proportion of this group will receive pension payments from Riester. Generally, as these groups also have lower claims to statutory and occupational pension schemes, they are at particular risk of old-age poverty. Old age poverty is a central problem of social policy that will become even greater in the coming years. Thus, the Riester pension must be fundamentally reformed if it is to be a key component of the pension system in Germany.

One possibility would be to organize a private pension scheme via a mandatory state pension fund, following the Swedish model of a standardized pension product with low administrative costs. Numerous proposals from various parties are already on the table for a state pension fund. However, important sociopolitical and organizational issues need to be clarified in the proposals for a mandatory funded pension system. In particular, it must be guaranteed that low-income earners and the unemployed can afford the mandatory contributions. Here the government could intervene and take over or subsidize the contributions, similar to the way unemployment insurance also pays the contributions of the unemployed or the Riester subsidy supports households with low incomes. Alternatively, opt-out rules (such as the possibility of being exempted from compulsory insurance at one’s own request) are also being discussed. However, this poses the risk that those who will later be at risk of old age poverty will opt out, thus having no claims in retirement. If the issue of low-income earners’ contributions can be resolved, such a state pension fund could make an important contribution to stabilizing the German pension system.

The full text “20 Years of Riester Pension – Personal Retirement Provision Requires Reform” is published as a DIW Weekly Report.

This text is jointly published by BCCP News and BSE Insights.