Germany's model links retirement age to life expectancy

The consequences of an aging population have for many years been a headache for many countries, including Greece, and have provoked opposition from many politicians and public opinion, especially considering that 70% of baby boomers (born between 1946 and 1964) have expressed a desire to retire early from the labor market.

Following in the footsteps of Greece and others to tackle this problem, the Munich-based Ifo Research Institute has proposed a paradigm shift in Germany’s insurance system, linking the increase in life expectancy to the rise in the retirement age. This proposal is essentially the same memorandum provisions that were also imposed in Greece during the previous decade’s financial crisis in order to save the social security system.

Citing similar changes that other European countries have made, the institute argues that there should be legislation that links the exit age from the labor market to life expectancy.

Apart from Greece, this model has already been adopted in the Netherlands, Sweden and Finland. The aim is to have a stable pensioner/worker ratio despite an aging population.

According to the study, this strategy addresses the economic ramifications of the expanding pensioner population. In this context, it considers that pensions should be adjusted for inflation rather than salary increases, which would lower pension expenditure.

The plan of action proposed by the renowned think tank aims to keep the pensioner/working population ratio at 40% after 2040. Indeed, this statistic would be significant because, unless steps are taken to reverse it, the Federal Bureau of Statistics projects that it will rise significantly beyond 2030.

The Ifo ideas may represent a potential answer to the demographic and economic issues that Germany and other countries face, but implementing them will prove difficult.

Moreover, it is difficult to design a long-term stable model for pensions without taking into account the consequences of high inflation and a possible recession.

Most European nations have a current retirement age of 65 years, according to Organization for Economic Cooperation and Development (OECD) data, with Greece, Italy, Luxembourg and Slovenia having the lowest effective retirement age of 62 for both men and women. However, the projected retirement term, or expected life outside the job market, has increased dramatically over time.

In 1970, men in OECD countries lived an average of 12 years after leaving the labor market, but by 2020, this had increased to 19.5 years. Similarly, women’s retirement years averaged 16 in the 1970s, but have increased to 23.8 a half-century later.