The German Fiscal Sustainability Report - Rationale, Methodology, Long-term Policy

Transcription

1 The German Fiscal Sustainability Report - Rationale, Methodology, Long-term Policy Werner Ebert German Federal Ministry of Finance Sustainability and Quality of Public Finances, Subsidy Policy KIPF Forum on Exchange Long-term Finance Issues between Korea and Germany, Korean Institute for Public Finance Seoul, 4 November

2 Outline 1) The demographic challenge in Germany: the evolution of a fiscal sustainability perspective of public policy 2) Methodology of the national fiscal sustainability report 3) The structure of the pension system in Germany 4) Basic results and policy scenarios 5) Policy implications and current debate 6) Lessons learnt and way forward 2

3 1) The demographic challenge in Germany 1950 Age 2008 and 2060 Age Men Women Men Women Thousand individuals Thousand individuals Thousand individuals Thousand individuals 3 Source: German Federal Statistics Office Upper boundary of medium population scenario 2060 Lower boundary of medium population scenario 2060

4 1) Old-age dependency ratio rising: Is PAYG still working? ratio of population 65+ per 100 population Korea 18,0 65,8 USA 22,3 36,9 China 13,0 46,7 Germany 32,2 58,6 France 30,6 46,3 Italy 35,1 67,6 Japan 43,3 70,9 Euro area* 29,3 52,0 4 Source: UN World Population Prospects: The 2015 Revision. *Euro area: year 2013, EPC Ageing Report 2015

5 1) Rationale for fiscal sustainability policy approach Ensuring the state s capability to act Fundamantal question of social cohesion and generational equity/fairness Social security systems/public budgets cannot escape from the logic of demography; only limited self regulating mechanisms FSR important early warning instrument Indicates need for action and policy parameters Creates public confidence by increasing transparency Raises awareness for costs of reform delay Prejudice Looking into the crystal ball Partly correct, however partial projection with explicit assumptions Logic of population trend is merciless 5

6 1) Evolution of fiscal sustainability framework 1st report (2005) Followed violation of the SGP Triggered by second demographic wave; post-reunification Conceptualized as MoF report; no report of the government No explicit part of the budgeting process Allows independence, independent research increases objectivity Nevertheless: close cooperation with line ministries Supports ownership and fruitful discourse, look behind the curtain Connects the report better to other reporting tools Fourth FSR presented to Cabinet on 17th February 2016 Shaped negotiations for federal budget 2017 and MTF Triggered substantive fiscal/social policy debate 6

7 2) Focus and basic projection principles Focus on ageing-induced risks in the very long run (2060) Fiscal sustainability: meeting the intertemporal state budget constraint Two baseline scenarios: optimistic and pessimistic scenario for capturing uncertainty and sensitivity of assumptions Demographic and macro-economic underpinning (Simple) macroeconomic background scenario Cohort simulation derived from population projection by National Statistical Office No policy change Quantifies need for action, the political workload Assumption: no counter action assumed a priori; debt brake not in work 7

8 2) Methodology: the basic model 8

9 2) Assumptions that feed into the projection T+ (optimistic) T- (pessimistic) Demographics Increase in total fertility rate to 1.6 until 2028 Increase in life expectancy of female new-borns to 88.8 years until 2060, of male new-borns to 84.8 years Total fertility rate constant at 1.4 Increase in life expectancy of female newborns to 90.4 years until 2060, of male newborns to 86.7 years Labour market Constant net migration of individuals per year as of 2021 Step-wise further increase in actual retirement age by two years from 2015 to 2029 Reduction of unemployment rate to 3.0% until 2030 Constant net migration of individuals per year as of 2021 Step-wise further increase in actual retirement age by one year from 2015 to 2029 Increase of unemployment rate to 5.5% until 2030 Macro-economics TFP of 1,125% per year as of 2020 TFP of 0.875% per year as of 2020 Inflation rate of 1,9% per year as of 2020 Inflation rate of 1,9% per year as of 202ß 9

10 3) Basic features of social security systems in Germany Financing: pay-as-you-go system Contributions: - employee - employer Tax revenue Benefits, e.g. - pensions - during sickness - unemployment 10

11 3) Basic outline of contribution payments Gross wages (euros per month) 3,000 Employee Employer Total contributions Contributions for: ,199 - pension insurance health insurance unemployment insurance long-term care insurance Taxes 503 Net wages 1,877 11

12 3) Statutory pension insurance In general: compulsory insurance exceptions include judges, civil servants and self-employed persons Types of pensions old-age pensions disability pensions survivors' pensions Pensions are adjusted every year as of 1 July (based on changes in an insured person's income) 12 Contributions: 50% paid by employee, 50% by employer 18.7% of gross wages (in 2016) contribution assessment ceiling (monthly income): 6,200 (west), 5,400 (east)

13 3) Statutory pension insurance Revenues and expenditures (2015) revenue 276 billion contributions (mainly employee/employer) 192 billion Federal government funding 84 billion expenditure 278 billion Insured persons and pensioners number of insured persons 53.3 mio. - number of pensioners 20.8 mio. active 34.5 passive 16.8 West Germany East Germany Men Women Men Women Old-age pensions 1, , Disability pensions Survivors pensions

14 3) Statutory pension insurance Average monthly benefits (in ) SPI old-age pensions (gross, 65 +) Total gross income (population 65 + ) West Germany East Germany West Germany East Germany Men Women Men Women Men Women Men Women Source: Alterssicherung in Deutschland 2011,

15 3) How is a statutory pension calculated? Sum of Earnings Points * Access Factor * Pension Value * Pension Type Factor Definition: Individual income p.a. divided by average income p.a. i.e. Deduction in case of early retirement (0.3% per month of early retirement) Currently (East) Depends on the type of pension calculated, i.e. between 0.1 and 0.55 for different survivors pensions Example: 45 years of average income Regular pension age Region West Germany Old Age Pension = 45 EP = 1 = = per month 15

16 3) Pension adjustment Principle of annual pension adjustment: Rule-based pension indexation in line with average gross wage development (capped due to demographic shift factor). Pension adjustment rule: p t { a wt 1, if a wt 1 0 = 0, if a w < 0 t 1 p: pension, w: average gross wage, a: demographic shift factor < 1 a t = crt 1 sft 1 16 cr: contribution rate, sf: sustainability factor

17 Federal subsidy (2015) 3) Federal government financing of statutory pension system 62.4 billion general federal subsidy: 40.2 billion supplementary federal subsidy: 22.2 billion Federal government contributions (2015) for child-raising periods: 12.1 billion Role in financing the statutory pension system Contribute to the financial security of the system Mitigate and balance the cost burdens for employees and employers Reduce non-wage labour costs Mitigate the demographic burdens facing the statutory pension system Lump-sum compensation for pension benefits not covered by contribution 17

18 3) Rules for updating federal subsidies General federal subsidy adjusted in line with changes in average gross wages and salaries per employee adjusted in line with changes in contribution rates Supplementary federal subsidy adjusted in line with the rate of change in VAT revenue changes in the tax rate are not taken into account Top-up to supplementary federal subsidy drawn from ecotax revenue adjusted in line with changes in gross wages and salaries 18

19 3) Statutory pension insurance 120 Trends in pension insurance benefits provided by the federal government, Additional benefits Miners' pension insurance Contributions for child-raising periods Federal subsidies Source: Federal Ministry of Finance, 2017 Financial Report 19

20 3) Federal financing for the statutory pension system How does federal financing for the statutory pension system impact the federal budget? How much of the statutory pension system does federal financing account for? Federal budget (2015) in billion in % Total expenditure % Federal financing for the statutory pension system 84 27% Statutory pension system (2015) in billion in % Total revenue % Federal financing for the statutory pension system 84 30% 20

21 3) Projecting age related spending on pensions Extrapolation of number pensioners offical statistics on current stock of pensioners (German pension insurance ) differenciates age, gender and kind of pension data on number and age distribution of new pensioners Extrapolation of contribution side employees paying contributions and unemployed demographic change extrapolates contribution base for the labour market channel macro assumptions and CSM important Simulation of pension expenditure takes into account structural shifts increasing labour market participation of women and of elderly reform legislation (pension age 67, pension reform 2014) balancing factors (sustainablity factor, so-called Riesterfactor) 21

22 3) Is the pension system sustainable? standard pension no - avge effective pension yes 22

23 3) Age related spending on health/long-term care Data base: official data from MoH on age profiles of expenditures Rules for extrapolation gender- and age-specific constant extrapolation of recipients in relation to respective population group contributers analogously extrapolated extrapolation factor: growth rate of GDP per capita Further scenarios wage growth (for LTC) taking into account technical progress (positive, negative) linking female labour participation with hospital care 23

24 4) Basic results: Age-related expenditure 35 % of GDP ,0 % 29.1 % 35 % of GDP ,0 % 32.7 % Health & Long-term care Pensions Unemployment Education & Family 24

25 4) Age-related expenditure in an international comparison Projected changes in age-related spending in pp of GDP China Korea Japan United States Germany France Italy Pensions Health Care & Long-Term Care Source: EPC Ageing Report 2015, OECD, IMF However: change and level important 23

26 4) Comparison of debt dynamics: no policy change vs. debt brake 26

27 4) FS compared: gap and debt dynamics unchanged, quality improved Medium-term fiscal consolidation implemented Time window slightly opened 25

28 4) Risks and Chances Labour Market Endogenous reaction of labour market to demography unclear Refugee migration => modelling optimistic Macro-economy Role of digital economy => TFP growth to be debated Low interest rate environment as chance and risk Pensions Clear mechanisms allow transparent quantification of risks Political gifts problematic for the general tone of the debate Issue of pension adequacy leads to social/political risk of reform reversal Health Care and Long-term Care LTC projection now more realistic Massive non-demographic cost drivers as black box No-policy change as implicit risk 28

29 4) Fiscal impact of refugee migration? 29

30 5) Policy implications: crucial factors for improving fiscal sustainability Effect of incremental transition from pessimistic scenario to optimistic scenario on long-term dept-to-gdp 225% 200% Actual MTP Projections T- variant 1. Lower rise in life expectancy In % of GDP 175% 150% 125% 100% 75% 4. Longer working lives 2. Higher fertility 3. Higher immigration 50% 25% T+ variant 5. Lower unemployment I+II 6. Higher productivity growth 0%

31 4) Recent reforms to improve fiscal sustainability Pensions Retirement age 67 and sustainability factor dominating Flexible Pension (incentives for old age workers) Strengthening occupational schemes for low-income groups Labour market Skilled Labour Strategy to maintain growth potential Migration Policy Health care & long-term care Increase competition between different providers in the health sector Financial grants for private, supplementary LTC insurance plans Establishment of an LTC provision fund 31

32 5) Lessons to be learnt Public budgets: strict compliance with debt brake Initial position allows frontloading of demographic financing Social systems: future proof mechanisms, increase resilience Link pension age to life expectancy, sustainability factor, private funding Structural reforms: change sensitivity parameters Structural unemployment, female employment, flexible working lives and patterns; skilled labour migration, family policy Quality of public finances: prioritization and efficiency gains Spending reviews, cost containment and competition (HC, LTC) 32

33 5) Institutional open issues Scope of fiscal sustainability report Sensitivity of assumptions: better scenarios What about the revenue side? Fiscal federal context: closer look at federal states and municipalities Placement of FS policy within government Keep MoF focus or broaden the footing within government? Connecting with budgetary process/medium term framework Institutional Anchoring Constitutional anquoring of generational equity parallel to debt brake Institutionalize strategic planning within the government 33

34 Thank you for your attention Further details: MoF-Homepage / English translation of the report 32