HOMESTEAD: social security reform in Germany

[Dan Bell <dbell@kent.edu>]

Dear "Homestead"ers, here is an article forwarded to me
from Richard Foley. I thought it might relate to some of
the recent discussions regarding social security.

Dan

May 10, 2001   [WSJ.com]

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Germany Is Set to Reform Pension System
To Include Privately Funded Component


By CHRISTOPHER RHOADS 
Staff Reporter of THE WALL STREET JOURNAL


BERLIN -- The German Parliament is on the verge of reforming the country's
120-year-old pension system, a move that would for the first time make
individuals partly responsible for their retirement planning and could help
fuel an already surging equity culture.

The center-left government is still scrambling to secure the necessary
votes to ensure passage of the reform, but leaders of key swing states have
indicated in recent days that they will likely side with the government's
plan.

[Go]German Unemployment Increased for the 4th Straight Month in April (May 9)

[Go]German Manufacturing Orders Slide in March, Fueling Fears of Recession
(May 8)

The Bundesrat, the upper house of Parliament, will vote on the measure on
Friday. The lower house, the Bundestag, already passed the bill in January.

Though criticized as being too timid and complicated, the package
represents a milestone for pension reform in Germany and Europe by
introducing a privately funded component inspired by the U.S. 401k plan.
Beginning next year, Germans for the first time would have the ability to
plan for their own retirements -- for more than a century a matter only for
the federal government -- through investments ranging from bond and stock
funds to real-estate and insurance products.

Currently, pensions are completely funded by payments shared by workers and
their employers. But an aging population and declining work force have
forced the government to propose cutting publicly funded benefits and
making up the difference with the new privately funded element. If the
reform passes, Germans will be allowed to place as much as 1% of their
gross wages in such products next year, increasing gradually to 4% by 2008.

Germans "will be forced to think over their investments and decide what
they want to do with their money," said Franz-Josef Leven, an economist
with the Frankfurt-based German Shareholding Institute. "This will be very
significant for the development of our share culture."

Indeed, fund managers are salivating over estimates that more than 260
billion euros ($229.74 billion) will flow into the new pension funds
annually once they are fully implemented. "You really only find good equity
cultures where you have pension plans based on equities," said Klaus
Martini, chief investment officer for global retail equities with DWS
Investment, the mutual-fund arm of Deutsche Bank AG.

The introduction of private pension plans in the U.S. and the U.K. in the
1980s was central to the shareholder boom in those countries. While the
popularity of equities has taken off in Germany during the past five years,
many Germans still liken them to gambling, rather than as a tool for
long-term savings. Associating them now with pensions should help change
that view, Mr. Martini said.

Also significant, the reform would point the way for other large European
countries facing the same demographic trends and budget constraints.

Much of Europe started to face up to the problem in the early 1990s, but
only by tinkering around the edges of their pension systems, such as by
raising retirement ages, or indexing benefit increases to inflation rather
than to gross wages. Even these minor measures prompted huge outcries from
unions.

France and Italy have begun moving toward more fundamental reform, but no
concrete steps are expected until after coming elections, in Italy this
month, and France next year.

Beginning this year, Italy increased tax incentives for wage earners to pay
as much as 5,000 euros a year into pension funds. But few have taken
advantage of this to date, said Giovanni Zanni, economist with Credit
Suisse First Boston. "The framework is there, but this will take some
time," he said. France, which set up a commission in 1999 to review its
system, introduced a contribution-based savings plan to encourage long-term
savings in February, but economists view it as only a temporary measure.

The German reform is "a political signal to other big countries," said
Thomas Mayer, economist in the Frankfurt office of Goldman Sachs & Co. "It
will make it hard for them to ignore this example of reducing generosity."
[chart: germany's pension]

Fund managers said there are still several shortcomings in the new system.
Chief among them is the requirement that the return on the private
investments is guaranteed, a measure that limits the return potential and
the choice of investments -- and runs counter to developing an
understanding of what shares are about. The condition should shave around
two or three percentage points from returns, funds managers estimated.
Also, the payout of the benefits is fixed, leaving pensioners no
flexibility in managing their holdings once retired.

The reform is "not a long term solution," said Christoph Bruns, head of
equities at Union Investment, a Frankfurt-based asset-management firm owned
by German cooperative banks. "But it opens the door a little bit."

Mr. Bruns added that the inflow of funds into such products is already
booming in Germany and Europe, a trend that the new measures undoubtedly
would accelerate. In the euro area in the past decade, funds managed by
institutional investors have more than tripled to 6.5 trillion euros,
according to Credit Suisse First Boston. But the region still has a way to
go to catch up to the U.S., according to the investment bank: Such
investments represent about 220% of gross domestic product in the U.S.,
compared with about 80% in the euro zone.

Write to Christopher Rhoads at christopher.rhoads@wsj.com
        
--
Dan Bell
International Program Coordinator
Ohio Employee Ownership Center
Kent State University
Kent, OH 44242
(330) 672-0333 << New direct number!
(330) 672-4063 fax
dbell@kent.edu
http://www.kent.edu/oeoc/
http://cog.kent.edu