German lawmakers passed landmark changes to the nation’s creaking pension system Friday with the aim of encouraging private old-age savings, ending months of uncertainty about a big economic reform project.
Chancellor Gerhard Schroeder hailed the long-delayed law as “a truly historic reform” that will help ensure the future financing of a social security pillar dating back to 19th-century imperial Germany.
Complementing gradual trims in pension levels already cleared by parliament, the new law takes account of an aging population that means ever fewer active Germans will support a growing number of retirees.
Passage of the government proposals by parliament’s upper house marked the third major economic policy success for Schroeder’s center-left government. It has already seen through Germany’s biggest postwar tax cut and a tight medium-term budget plan designed to balance the federal books.
Schroeder beamed after key opposition members decided to endorse the plan in the upper house, clearing its last legislative hurdle.
“You will understand that I am very happy,” he told a news conference, adding that both young and older Germans would be “winners” under the reform.
The new law encourages workers to invest part of their income into individual retirement accounts, with income taxes deferred until payout time. A number of European countries have already introduced such plans. Germany’s takes effect Jan. 1.
To promote the plan, the government plans to offer annual tax breaks and subsidies gradually rising to 20.5 billion marks (US$9.2 billion) by 2008. Workers can put 1 percent of their gross salaries into private pension plans in 2002 and up to 4 percent by 2008.
However, a crucial — and unresolved — part of the reform reflected Germans’ continuing aversion to market risks.
Asset management companies that are expected to introduce retirement savings products are concerned about the law’s promise of a money-back guarantee, which pledges that investors will get back at least what they pay in.