Retirement at the age of 67 – A Story of Misconceptions

The unpopular "pension 67" is again dominating German headlines. On the one hand, this is due to reactions of the Social Democratic Party, which has now, curiously enough, distanced itself from that reform. Originally, however, the reform had been enforced by the former party leader and Federal Employment Minister of the SPD. On the other hand, the media presence can be ascribed to the review of the planned increase in retirement age, appointed by law for 2010. One main reason for the "pension 67's" low popularity is that its story is a story full of misconceptions.

The first misconception lies in the fact that people believe the retirement age of 67 years would apply to all. However, this is not the case. The pensionable age of 67 years will not come into effect today, and it will not come into effect tomorrow. In fact, it will only fully impact the retirement of the cohorts from 1964 and onwards - namely in the year 2031. In the meantime, the pensionable age will be increased in monthly steps from 2012 on and in two-month steps from 2024 on. As a result, people from the 1947 cohort, for instance, will have to work one month longer. Nobody will have to work for an additional two years overnight.

The second misconception is related to the argument that future pensioners are treated unjustly because they will have to work for an additional two years, in comparison to today's pensioners. According to a rather conservative prognosis of the Federal Office of Statistics, however, the 65 year old of 2030 will approximately live three years longer than today's 65 year old. Of these additional three years, he will be constrained to work two years and in turn be entitled to draw pension for an additional year. Compared to today's 65 year olds, he will be granted an extra year. In addition, a 65 year old in 2030 will also benefit from a better health.

This fact gives rise to the next misconception: people argue that a 67 year old will be unable to perform certain tasks (like a roof tiler), thereby having a 67 year old of today in mind. At the worst, a 67 year old of 2030 will be compelled to climb on the roof, not a 67 year old of today. This 67 year old, however, will be at least as healthy and fit as today's 63 year olds. In order to judge if a 67 year old will be able to perform a task in 2030, one must consequently observe today's 63 year olds. Moreover, there are numerous alternatives to employ a skilled craftsman should he no longer possess the physical fitness required. In fact, the generally observed trend of an increase of physically less demanding tasks will continue.

At this point, the next misconception comes into play: people observe today's working conditions and employment market and argue that it holds no employment for older people and, moreover, will also not hold any in 2030. But that is simply wrong. The employment market of 2030 will distinguish itself significantly from today's. Already today, the skilled worker shortage is lamented. In 2030, sending well educated employees into early retirement will be a luxury companies can not afford, as demographic change will reduce the labour force by 5 million employees.

In addition, it is also irrelevant to consider the present employment rates of older employees: 66 year olds are not expected to hold a job today but in the middle of the 2020s. On top of that, numerous political actions should not encourage early retirement in a first instance, as has occurred in the last decades, to then simply overturn pension with 67 on the basis of low employment rates of older employees. Arguing that older employees are taking away employment from younger ones is, seen from a macroeconomic point of view, in any case nonsense and will turn out to be total nonsense in the future.

Another misconception is the widespread believe that "pension 67" was only introduced in order to reduce the increase in the contribution rate of pension insurances. In support of this, the small contribution rate effect (Beitragssatzeffekt) of 0.5 percentage points has been quoted. However, on the one hand it must be remarked that in the long run, therefore beyond 2030, the effect will be much stronger. On the other hand, other social security benefits offices will also be disburdened. Employees, for example, pay higher health insurance contributions than pensioners. In case employees have to work until the age of 67, the entire growth potential of the economy will increase and likewise fiscal revenues.

Here, another misconception arises: older people are in principle by no means less productive than younger ones. To sum up: "pension 67" is correct and would possibly be not quite as unpopular if the numerous misconceptions didn't exist.

The article was published as a guest contribution of Dr. Martin Gasche to DowJones Germany
[http://www.dowjones.de/site/2010/08/die-rente-mit-67-eine-geschichte-vollermissverst% C3%A4ndnisse.html].

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