Target missed: Supplemental pension benefits (“Grundrente”) create new injustices
A recent study by the Munich Center for the Economics of Aging (MEA) concludes that the introduction of a public pension supplement in Germany in January 2021 creates new injustices: almost 24% of those pensioners who are not eligible for the new pension supplement are nevertheless poor. At the same time, 21% of the eligible pensioners belong to the wealthier half of German pensioners.
"The reform that implements supplemental pension benefits creates new injustices in two ways," explains MEA Director Axel Börsch-Supan. "On the one hand, people are excluded from the supplemental pension benefits because they do not have a sufficiently long insurance history, for instance because they worked part-time, which is especially true for women. On the other hand, there are indeed recipients of supplemental pension benefits who own above-average wealth," says Börsch-Supan.
MEA researchers have taken a closer look at the new law and examined who benefits from the supplemental pension benefits – and who does not:
Many low-income pensioners are not eligible
According to MEA calculations, 23.9% of pensioners who are considered low-income in the sense of the new law are not entitled to the supplemental pension benefits because they do not fulfill the required number of service years whereas 21% of eligible pensioners have net worth above the median wealth of all pensioners. 9.4% of eligible pensioners even have more than twice the median net worth of all pensioners.
In addition, the MEA researchers examined how the inclusion of wealth in the income test would affect the number of eligible pensioners.
69% of eligible pensioners would not be eligible if wealth was included
7.1% of all German pensioners are entitled to supplemental pension benefits according to the simple income test mandated by law. If other assets, such as owner-occupied housing or whole life-insurance, were included in the income test, only 2.2% of all pensioners would be eligible. In other words, 69% of eligible pensioners have a wealth level that lifts them above the income threshold defined by the new law.
Conclusion of the researchers: the supplemental pension benefits are doubly unfair: the new law encompasses too few people who need assistance and grants benefits to too many people who do not.
Börsch-Supan, A., Bucher-Koenen, T., Goll, N. and Hanemann, F.: "Targets missed: Three case studies exploiting the linked SHARE-RV data", Journal of Pension Economics and Finance.
The eligibility criteria and purpose of supplemental pension benefits (“Grundrente”)
Since January 1, 2021, many pensioners have been entitled to a supplement to their public pension through a new law. The supplemental pension benefit is paid to those pensioners who have an insurance history with at least 33 service years that count towards eligibility for the new supplement and have earned between 30-80% of the average wage. For pensioners with service years between 33 and 35, the law imposes much lower upper thresholds. Service years include years of employment subject to social security contributions as well as periods for the upbringing of children, care of family members and other insurance-relevant periods; periods in low-hour part-time employment and mini-jobs are not considered. At the same time, full supplements are only paid to households whose monthly household income does not exceed 1,250 euros (single-person households) or 1,950 euros (couple households). Other assets are not considered in this simple income test. The aim of the supplemental pension benefit is to reward the work performance of people with long insurance histories and below-average incomes through supplements to their pension entitlements.
The SHARE data
MEA researchers use the SHARE-RV data set for their calculations. This allows them to include the household context and assets of pensioners in the analysis. SHARE, the Survey of Health, Ageing and Retirement in Europe, is a research infrastructure for studying the effects of health, social, economic and environmental policies over the life-course of European citizens and beyond. From 2004 until today, 480,000 in-depth interviews with 140,000 people aged 50 or older from 28 European countries and Israel have been conducted. Thus, SHARE is the largest European social science panel study. More information: www.share-eric.eu.
coscia (at) mea.mpisoc.mpg.de