For quite some time now, I have been closely following news and reports out of Germany regarding the country’s pension system and the immense pressure it is under, placing those who support it and depend on it at great risk. Germany might be widely celebrated as the economic powerhouse of the EU and as its higher net contributor, supporting countries like Greece and Poland, and yet it would appear that the German state is now struggling to keep the promises it made to its own citizens. Old age poverty is on the rise, while the German pension system is steadily marching towards the edge of a cliff.
To get a better understanding of the factors that led up to this upcoming pension crisis and the systemic flaws that made it inevitable, I turned to Carlos A. Gebauer, who kindly agreed to share his insights and perspective on the matter.
Carlos A. Gebauer has studied Philosophy, Modern History, Linguistics, Law and Musicology. In addition to his work as a solicitor and specialist lawyer for medical law in Düsseldorf, he is a judge in the second senate of the Higher Lawyers’ Court of North Rhine-Westphalia and also serves as deputy chairman of the Friedrich A. von Hayek Society. As a Fellow of the Liechtenstein Academy, he teaches legal theory and rhetoric. Apart from his numerous scholarly legal texts in academic journals, he also writes for the FAZ, the NJW, the ZRP, Schweizer Monat, Schweizerzeit, the magazines Cicero and Pardon, Novo Argumente, The European, Achse des Guten, while he is a regular columnist for Freie Presse Chemnitz, Wirtschaftswoche and the Eigentümlich Frei magazine. He has published a number of books, among them “Warum wir alle reich sein könnten und wie unsere Politik das verhindert”, “Der Gesundheitsaffront” and “Rettet Europa vor der EU”.
Claudio Grass (CG): In order to understand much of what is wrong with the German pension system, I think it’s important, especially for our international readers, to understand its core foundations. Could you summarize for us the basic principles and the structure of German pensions?
Carlos A. Gebauer (CAG): There are still multiple and variously shaped methods to ensure one’s income in old age in Germany. As a rule, the starting point is the way someone earns his income during the time of his professional life. Apart from some exceptions, like certain freelancers or public servants, who run their own pension schemes, all other common employees have to take part in a compulsory and state-run retirement system. Thus, signing a labor contract automatically causes the employer‘s membership to the community of all compulsorily insured persons. And it is nearly impossible to circumvent this automatic and mandatory participation.
Central to this concept, stands a pay-as-you-go system, i.e. an unfunded retirement plan: A so-called intergenerational contract coerces today’s professionals to pay contributions that finance present retirees. The rights and obligations that result from this, entitles all members to have their own chance to get pensions out of this community coffer one day in the future.
CG: What are the historical roots of the government pension system and what was the political situation and the reasons for its implementation?
CAG: The idea of having such a state-run pension system goes back to the founding of the imperial “Deutsches Reich” in 1871. Only a few years after its formation, the ruling elites were increasingly confronted with the emergence of social disturbances. The spearheads of the working class challenged the state’s power. It then was Chancellor Otto von Bismarck who strived to diffuse this situation. As he wrote in his biography later, to achieve this, he corrupted his opponents by launching a system of so-called social security: „My leading thought was to win over – or should I say: to bribe – the working class by making the workers look at the state henceforth as an institution that in fact exists for their sake and is meant to care for them.“
CG: Can Germans still count on the government’s promises about their pensions?
CAG: Well, as with all promises, only time will tell if they will be honored or not. However, an increasing number of experts tend to forecast that we will see a shattering breach of this promise. First of all, the number of citizens paying into the system is dwindling, since we see cohorts with a low birth rate coming into their professional lives. Thus, the ratio of the aged taking from the community coffer compared to those paying into it, is getting more and more out of balance. Secondly, our legal system is not yet ready to hold into account those politicians who implemented and maintain such a dysfunctional and unsustainable system.
CG: What do you identify as the main contributing factors that led to this upcoming pension crisis and what does it mean for the future?
CAG: Some say we should blame contraceptive techniques for the decline of birth rates in Germany, as the core reason of unsustainable second-generation magnitudes. However, I think this explanation is missing the mark. We should instead be looking at the root of the problem, namely at the motivation patterns that this compulsory system creates for all its participants. This view will lead us to different findings: Human beings tend to become complacent (and, as a rule, rather too comfortable) as soon as they sense a chance to profit from certain circumstances that they do not have to create or support themselves but that exist nevertheless.
From this perspective, that can be seen as a form of the “free-rider syndrome”. The public pension system has established a gigantic contract at the expense of third parties: One can later profit from children and their contributions into the community coffer without first investing into it by parenting them. The whole system, however, blatantly disregards the essential “privity of contract” principle, which stipulates that a contract cannot confer rights or impose obligations upon any person who is not a party to it in the first place.
CG: Let’s have a look at the balance sheet of the pension system. What kind of assets are mainly held and what happens if we go deeper into the systemic debt crisis that we already are in?
CAG: Apart from exceptional cases – i.e. an entrepreneur who never worked as an employee in his life and got his pension organized differently – a common retiree inside the state-run pension system of Germany actually holds no assets in the sense of physical securities, shares or other property holdings like that. Only the sheer labor force, that was predominantly yet unborn during his own time on the job, serves as a sort of bailsman to act as a guarantor for his pension payments for the rest of his life.
In case (or should I say: as soon as) the excessive indebtedness of public coffers, as well as that of private banks and insurance companies, becomes obvious and can no longer be ignored, we will certainly, as is always the case in such situations, have to face a period of mass unemployment and go through a systemic crisis until our economies get realigned again. During this interim period, I expect a massive political intervention will be needed to bridge the unavoidable payment gap for all these pensioners. Politicians will have to face a choice between the devil and the deep blue sea: Either they will violate the property rights of private long-time depositors and use their funds to meet the pension obligations or they will hang insolvent seniors out to dry.
In the upcoming second part of our interview with Carlos Gebauer, we discuss the merits and ultimate effectiveness of the measures that were enforced so far to help keep the pension system’s collapse at bay, and we’ll take a closer look at the bigger economic picture and outlook for the coming years.