Social Security Reform in Advanced Countries: Evaluating Pension Finance

Kai A. Konrad and Gert G. Wagner

This paper studies the current status in the German pension system and discusses the various reform proposals. It concludes with a short evaluation of the recent pension reform of 2001.

Entering the new millennium, Germany can look back on more than 100 years of a public pension system. The system originated in 1889 as part of Bismarck's policy of establishing a public social security system which was an answer to the pressing social and political situation. He tried to remedy the political conflict and to satisfy to some extent the demand for protection from risks that emerged with the arrival of a large working class that had no chance to develop institutions to cope with these risks. The pension system was initially designed mainly as disability insurance, with the major share of contributions used for work disability pensions. The system was available to and mandatory for a limited group of the workforce, the replacement rate provided by the system for those who reached the (at that time rarely attained) age of 70 years was rather low, and the system was partially funded (see, e.g. Lampert 1996).

The history of reform of the system during the last 100 years was smooth and, for most parts, unidirectional. First, the types of workers required to participate in the system systematically expanded with time. Today (in 2001) mandatory participation in the public pension system encompasses almost all groups of earners with the exception of some groups of self-employed professionals and civil servants, ² without provisions to opt out even for higher income employees. ³ Reforms established in 1999 continued and finally completed this process: criteria have been tightened by which activities are considered self-employed, forcing some further groups of self-employed individuals into the public pension system. This latest reform was intended as a reaction to the current trend of individuals in several professions to opt out of the public pension system by

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