Retirement at 70: Are pensioners to blame for inflation in Germany?

_ Dr. Ulrich van Suntum, honorary professor, University of Münster, former Secretary-General, German Expert Council for the Assessment of Overall Economic Development (SVR). 26 May 2022.*

Three top German economists surveyed by the Bild newspaper spoke out in favour of raising the regular retirement age in Germany to 70 years. This can also be used to fight inflation, argued Stefan Kooths, vice president of the renowned Kiel Institute for the World Economy. Otherwise, due to the labour shortage, wages and ultimately prices would continue to rise. The bad word about “pensioner inflation” is even said to have fallen.

The outrage is correspondingly great. According to the trade unions and social organizations, the proposal is nothing more than a disguised pension cut. And to blame the pensioners for the depreciation of the currency is an outrage. Even on Twitter, the verdict is unanimously devastating. Politicians hastened to assure that this proposal “from the ivory tower” would never get through.

“Retirement at 70” in no way means that everyone has to work until they are 70, on the contrary. It creates more flexibility for individuals and rewards those who work longer hours than others. This is fair and necessary in order to be able to finance the system at all in the future.

Yet it is anything but new. Science has been warning for many years that the pay-as-you-go pension system cannot go on like this. The renowned financial researcher Bernd Raffelhüschen (University of Freiburg) agrees with his colleague in Kiel: The expensive pension reforms of the past are not covered by future contribution income, but are being financed with debt. The Leipzig economics professor Gunther Schnabl also supported Kooths’ proposal. One can’t fix the shortage of skilled workers by sending people into retirement earlier and earlier; the opposite is actually necessary.

Pension costs are rising faster than gross domestic product

The demographic development is indeed frightening: as early as 2020, there were around 40 people over 65 for every 100 people of working age. In 2030 there will already be 55 older people whose pensions will have to be financed by fewer and fewer workers, and by 2050 this so-called old-age dependency ratio will rise to around 75 percent. According to the Federal Statistical Office, the number of pensioners increased by 86,000 in 2019 alone. The corresponding additional costs, including private and company pensions, rose by 5.2 percent and thus far more than the gross domestic product. It cannot go on like this in the long run. Otherwise, the younger generation, who are increasingly being asked to pay, might one day terminate the generational contract altogether. After all, they never signed it personally.

Ultimately, the culprit is the far too low birth rate since the pill was dropped in the 1960s. Where yesterday there were too few children, today there are simply not enough workers. You can no longer change that, no matter how generous family benefits are. Not only that the children have to grow up first. There are already far too few mothers to be able to save anything in this way.

If we had brought more children into the world, we could also retire earlier and with higher pensions. It’s too late now, and unfortunately the migrants aren’t helping us either; thanks to Merkel, they’re putting an additional burden on the social security systems as a whole.

Immigration not a solution

Even more immigrants would hardly help. As a rule, they are significantly younger than the German population. But even if hundreds of thousands came every year, the effect on the old-age dependency ratio would remain comparatively small. On the contrary, it would still rise significantly compared to today to around 60 percent, as simulation calculations by Raffelhüschen and others show. In addition, immigrants are only of use to the social security system if they can be successfully integrated into the labour market and into society. So far, however, this has not been the case in too many cases. According to empirical studies, migrants currently cost more on average than they contribute in taxes and contributions.

Ultimately, the only remaining adjustment screw is the retirement age if you want to save the system from collapsing. However, “retirement at 70” does not mean that everyone will have to work up to this age in the future. On the contrary, earlier drawing of a pension should continue to be possible according to the present models, and in this way even more flexibility is created for the individual. Today, at the latest at the age of 66, you are thrown out the door, whether you like it or not. In the future, on the other hand, one should be able to decide for oneself on a larger scale when to end working life, depending on the type of job, health and one’s own private or company pension scheme. Of course, the earlier you leave, the lower your pension will be. This is the case practically everywhere in the world and seems reasonable and fair.

“Whining” at a high level

The sticking point is, of course, how high the standard pension is. If the whole thing is supposed to improve the system’s ability to be financed, it obviously cannot be as high as it has been up to now with the same retirement age. However, to speak of a “pension cut” is misleading. Because the absolute pensions calculated in euros increase every year, assuming corresponding economic growth. Only the level relative to wages can no longer be the same as before. This actually follows inevitably from the rising old-age burden quotient. It must be remembered, however, that never before has a generation of pensioners been better off than today, not to mention the situation in other countries. So we’re whining on a high level, so to speak.

Incidentally, we complain here at a high level that old people in most other countries on this planet can only dream of. One should never forget that in the discussion.

However, all of this has little to do with the development of inflation. Because labour shortages may drive real wages up. But this can certainly go hand in hand with stable or even falling goods prices. After all, monetary policy alone is ultimately responsible for the development of prices.[1] If, for example, wages paid in euros rise by four percent, but the price of goods by only one percent, then real wages will already increase by three percent. The thesis put forward by economists Charles Goodhart and Manoj Pradhan in 2020 that the inflation rate must increase for demographic reasons alone is therefore incorrect.[2]

There are therefore good reasons for a higher, and at the same time more flexible, retirement age on average. But the risk of inflation is not one of them. It has completely different causes, which are mainly due to the much too high government debt in the euro area and the wrong policy of the ECB. They should not be allowed to evade responsibility for this by referring to demographic developments.

Notes

[1] Van Suntum U. (2022). Inflation island Switzerland. MIWI Institute. URL:  https://miwi-institut.de/archives/1899

[2] Van Suntum U. (2021). Inflation through demographic change? MIWI Institute. URL: https://miwi-institut.de/archives/859

*Translated and republished from the original: Van Suntum (2022). Sind die Rentner schuld an der Inflation? Junge Freiheit. URL: https://jungefreiheit.de/debatte/kommentar/2022/rentner-ab-70/ 

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