Paradigm Shift: The Reform of the German Public Pension System in 2001

“It is necessary and we’re going to do it. Basta.”¹ Gerhard Schröder, the chancellor of the Federal Republic of Germany and chair of the country’s Social Democratic Party (SPD) shouted these words at the meeting the Union of Public and Transportation Employees (Gewerkschaft Öffentlicher Dienst, Transport und Verkehr) in Leipzig on November 5, 2000. They expressed his frustration at the union’s opposition to his plan to reform Germany’s compulsory, public retirement pension system (Gesetzliche Rentenversicherung–GRV). Despite that opposition, Schröder and his labor minister, Walter Riester, also SPD, passed two laws that fundamentally changed both the objectives and the finances of the pension system just a few months later. As a result, the GRV would no longer provide benefits sufficient to maintain a retiree’s standard of living. Instead, it would scale benefits to its revenues. However, Schröder and Riester were unwilling to reduce the total income available to retirees. Therefore, they moved Germany away from its traditional reliance on a single government pillar, the GRV, to a multipillar model under which retirees would also receive income from private savings plans that would invest in the stock and bond markets. The striking aspect of this reform was that it was carried out by a coalition led by the Social Democrats, a party that has traditionally been suspicious of capitalism, let alone financial markets.

The following account will explain how the German Social Democrats cut retirement benefits delivered by the compulsory public pension plan and created private, voluntary retirement savings plans, called Riester-Pensions (Riester-Rente), to offset that cut. It will explain why these reforms represented a major change in Germany’s pension system, a change so important that it justifies being called a paradigm shift.² Unlike other analyses of the paradigm shift, the discussion will make clear that the timing and the extent of the reform were due to a change in the leadership of the Social Democratic Party that brought it into line with the opposition parties creating a new, informal consensus on how to reform the public pension system.³ I will begin with a summary of the main characteristics of the German pension system and then will describe the changes that took place at the upper levels of the SPD. Those changes were the decisive factor that made possible the major reform of the pension system in 2001. I will then recount the legislative process that led to the passage of the two pension reform laws and summarize their features. The pension reform laws were complex, omnibus vehicles that provided for alterations to a number of facets of the delivery of pension benefits. The focus of the discussion will be on the changes made to retirement pensions, leaving aside the reform of survivors, women’s, and poor retirees’ benefits. I will present the account in the form of a traditional historical narrative with supporting analytical sections.

The German pension reform of 2001 occurred for four interrelated reasons. First, a broad consensus had developed that the pension system needed modifications. A majority of the decision-making elite had concluded that demographic changes, particularly Germany’s low birthrate and increasing life expectancy, had rendered the GRV’s existing financing mechanism untenable. In addition, the country’s business community had convinced a majority of the political elite that Germany’s labor costs made its export-oriented manufacturing sector uncompetitive in the globalized marketplace.⁴ Moreover, changes had taken place in the political landscape that made a market-oriented solution to the pension problem seem possible for the first time. In both major parties, the SPD and the Christian Democrats (CDU), and their Bavarian allies, the Christian Social Union (CSU), sentiment had shifted toward supporting capital market solutions to the pension problem. As a result, an informal consensus developed about what should be done.

The remarkable Riester-Reform has been the subject of a great deal of scholarly and popular literature. In addition, much primary source material is available.⁵ The minutes of the meetings of the German parliament and the supporting...