interview
More and more employees are opting for retirement at 63. But only high earners can afford it, says IW pension expert Ruth Schüler. The younger generation will have to work until they are 70 anyway
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Capital: Ms. Schüler, many employees are only doing their job by the book, known as quiet quitting. But more and more older workers are actually quitting and taking early retirement. Why?
Ruth Maria Student: The preference for free time is very high and the incentive to continue working is very low. This can be justified with economic theory. Since January, there has been no additional earnings limit for early retirement pensions, meaning early retirees can earn as much additional money as they want without having their pension reduced. But it remains to be seen whether this will motivate more people to work longer. We already had generous regulations for additional income during the Corona pandemic and yet only a few people took advantage of them. One reason is probably that this extra work doesn’t always pay off in tax terms in the end.
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Ruth Maria Student is an economist at the employer-oriented Institute of German Economics (IW) in Cologne. She conducts research in the Department of Social Security and Distribution on the topics of pension provision, care, tax and financial policy and distribution issues.
Who can afford to retire at 63?
In any case, hardly anyone who has worked hard all their life for a small pension can do so. The so-called pension at 63 is mainly applied for by people who have a sufficient statutory pension in prospect and additional income from private and company pension plans or investments. The option of early retirement is particularly often used by those who have an average household income of between 20,000 and 26,000 euros net per year. Almost no one from the lowest income bracket can claim the pension at 63. Even if they have completed 45 years of insurance, their income is not enough to retire early.
So who is the typical early retiree?
To put it bluntly, the classic early retiree is a skilled worker from East Germany who retires without deductions after 45 years of insurance. In general, more men than women take advantage of this opportunity and early retirees often do not have an academic degree. The higher the level of education, the more likely employees are to work beyond the standard retirement age. This is shown by the data from the Socio-Economic Panel (SOEP) and the German pension insurance, which I was able to link and evaluate for the first time in 2022 in such a way that they allow these conclusions to be drawn. The SOEP is a huge survey that has been running since 1984 and representatively surveys households in Germany on socio-economic topics.
Can we even afford so many early retirees?
No, and we shouldn’t afford them. It is an extreme burden on the pension system; in July 2021 alone, the pension fund paid out 3.4 billion euros to people who retired early without deductions. Because our pension system relies on the productivity of the population, it is by no means lost, I want to make that very clear. But life expectancy is increasing and with it the time in which we have to pay the pensions of early retirees. Given the demographic change, retiring at 63 is a bad idea.
“Everyone has to make provisions in a different way, privately or professionally.”
But what do you want to do if people want to retire earlier?
Flexibility must be increased at both a political and a business level. If an employee tells me that she is prepared to continue working ten hours after she retires, that must be possible. Such people must be used sensibly. Good personnel policy is important. The framework must be such that the person can combine their work with everything else they have planned for retirement. It sounds banal, but there is a lot of potential in scheduling people who do not work full-time in such a way that everyone is happy and it creates added value.
If the typical early retiree is mostly male, why are fewer women taking early retirement?
Women are less likely to exceed the 45 years of insurance limit required for early retirement without deductions. But that is the status quo. The young generation of women under 45 in particular will achieve longer insurance periods than women who retire today. This should be kept in mind when talking about women’s poverty in old age, which is an issue for many current or soon-to-be retirees. The time off for childcare has already become shorter over the years. This is good security for old age. My analysis also shows that women now continue to work even when their partner retires. This was different for a long time.
That sounds hopeful.
Yes, I think many women have understood how important it is to stay close to the job market. The longer and the more you pay in, the more pension you get. I hope that the younger generation of women can slowly close the pension gap with men. However, it is clear that the statutory pension alone is not sufficient security for old age. Everyone has to make private or corporate provisions in a different way. Women should therefore under no circumstances withdraw from their company pension scheme because of the birth of a child. This continues to happen and that is a cause for concern.
Does Generation Z have a healthier concept of work than many older people because they no longer just want to earn big money, but rather do something meaningful?
It is certainly a good investment for employers to embrace this mindset, especially in terms of keeping people in the labour market beyond the normal retirement age. If work is more than just the income you earn, this will generally motivate more people to work longer.
How long will the young generation have to work?
If you want to keep the contribution rate and pension level fairly stable, definitely until you’re 70. I have the feeling that young people also assess this very realistically. The issue of retirement age holds great potential for conflict between generations and politicians must be careful, especially when considering funded pensions. As a first step, 10 billion euros are now to be invested in the capital market. This sum is financed through debt, meaning that the risk has to be borne primarily by the younger generation. The people who are now young also pay all other expenses for early retirement.
Source: Stern
