The Changing Face of Retirement Income Provision in Germany and the United States

This section summarizes recent trends in the German and American systems of retirement income provision and discusses likely implications for inequalities between and within recent retirement cohorts. The focus is on changes that affected workers who retired between the 1980s and 2000s—the period spanned by the household panel data analyzed below.

Several important reforms primarily targeted at later and/or future retirement cohorts will therefore not be discussed. One important example is the German effort to strengthen complementary pensions (for example, through the so-called Riester-Reform of 2001).

Declining Public Pension Replacement Rates

Many Europeans are surprised to hear that the US has long had a sizable public pay-as-you-go pension pillar—often simply referred to as ‘Social Security’. Many find it even more surprising that Social Security benefits are quite redistributive, with much higher replacement rates for workers with low (lifetime) earnings. Yet it is also true that its replacement rates were always quite low by international standards, particularly for high- earning workers—hence the important role of complementary pensions in the United States.

In both Germany and the US, public pension replacement rates fell noticeably from the 1980s to the 2000s. Munnell (2013: Table 5) estimates that net Social Security replacement rates1 for a worker with medium earnings retiring at age 65 declined from 48 per cent in 1980, to 42 per cent in 1990, and to 37 and 38 per cent in 2000 and 2010, respectively.[1] [2] [3] In Germany, the standard pension level (Standardrentenniveau) after mandatory social insurance contributions (but before taxes) declined from 57.6 per cent to 52.6 per cent between 1980 and 2005 (Deutsche Rentenversicherung 2015, 258). Under current legislation this trend is set to continue over the coming years (Munnell 2013; OECD 2007).

  • [1] Net replacement rates are Social Security benefits after taxes and (Parts B and D) premiums forMedicare, the public healthcare programme for Americans aged 65 and older, expressed in per centof pre-retirement earnings. See Munnell (2013) for further details.
  • [2] The corresponding values for a medium-earning worker who retires at age 62/70 are 38 percent/51 per cent (1980), 33 per cent/49 per cent (1990), 29 per cent/49 per cent (2000) and 28per cent/53 per cent (2010).
  • [3] The standard pension level compares the pension of a hypothetical pensioner with 45 years ofaverage earnings to the average earnings of current insured workers.
 
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