Civil Servants' Pensions: Are Budget Holes Stuffed With the Pension Fund?

Civil Servants' Pensions: Are Budget Holes Stuffed With the Pension Fund?

A wave of pensions is rolling towards Germany – with a foreseeable burden in the billions. There is at least some reserve for it. The most populous federal state of North Rhine-Westphalia now wants to use this – and is receiving criticism.

Eight years ago, Marcus Optendrenk, as a CDU finance politician, was still in the opposition in the North Rhine-Westphalian state parliament. And then he criticized the SPD finance minister at the time, Norbert Walter-Borjans, for his plan to pay significantly less into the state’s pension fund in the future, with only 200 million euros a year. Optendrenk feared that the minister wanted to use a trick to relieve the state budget while weakening future provisions.

Now Optendrenk himself is the finance minister in the most populous federal state – and wants to completely stop the transfers to the pension fund. He is even planning something new: the fund will be used for the first time. In 2024, the interest income of 343 million euros is to flow into the state budget “in order to cushion the increase in pension and benefit expenditure,” as Optendrenk said when the budget draft for 2024 was presented in the state parliament. Interest income should continue to be allocated to the state budget in the future. However, the capital stock – which amounted to 13.1 billion euros at the end of 2022 – should be preserved.

Optendrenk sees this as a contribution to the sustainable management of the fund and to a generation-fair allocation of financial resources. When the pension scheme started around 20 years ago, it was clear “that the burden on the country would increase particularly sharply when the baby boomers start retiring in their mid-20s”.

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also read this guest article: The pension scheme for civil servants is not sustainable in the long term

However, there is criticism this time as well: The “planned financial gimmick” will make it considerably more difficult to cushion future pension burdens, warns the North Rhine-Westphalia Taxpayers’ Association. “The planned law seems to me to be a quick shot to plug budget gaps. A long-term funded pension security atrophies like a drop in the ocean,” says Rik Steinheuer, Chairman of the State Taxpayers’ Association. It is imperative to continue paying into the fund and not withdrawing anything. Before the fund is “tapped”, appropriate criteria are needed as to when and to what extent payments can be made. This would probably make sense from 2030 at the earliest, because only then would civil servants retire in large numbers.

“Foreseeable additional burdens”

Today’s pension fund of the state of North Rhine-Westphalia goes back to two originally separate pots: a pension reserve that has been built up since 1999 and a pension fund that has been funded since 2006. Both pots have only been combined in the pension fund since 2016. The concept behind the pension fund originally envisaged that 70 percent of the pensions of all civil servants hired from 2006 should be financed with it. The rest has to come from taxes anyway. However, the state audit office recently criticized that the existing funds and allocations were not enough for this. The insufficient provision will foreseeably lead to additional burdens in future budgets, according to the 2023 annual report of the State Audit Office.

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The dispute in North Rhine-Westphalia illustrates a nationwide problem. It was not until the mid-1990s that reserves were started to be set aside for future pension entitlements by civil servants. The pioneer was Rhineland-Palatinate, which originally even wanted to ensure the complete supply of all civil servants hired from 1996 with its pot filled from 1996.

In 1998, the federal government started its pension reserve. Initially, there was a binding requirement for the federal states to adopt this concept. With the federalism reform of 2006, however, this was abolished again, so that each country operates its own provision – or not. An evaluation by the Ifo Institute from 2017 showed massive differences depending on the country. As of the end of 2015, in Rhineland-Palatinate there were 1,414 euros per inhabitant in reserves for pension costs, while in Lower Saxony it was only 65 euros.

Funds are already being used in some federal states. At the federal level, withdrawals are not planned until 2032, spread over 15 years. The existing reserves also differ significantly in their amount depending on the federal state. In North Rhine-Westphalia, the pots are still comparatively well stocked. Baden-Württemberg also has a larger reserve, which amounted to 9.5 billion euros at the end of 2022.

The only thing that is certain is that the funds will be needed soon. In North Rhine-Westphalia, a total of almost 219,000 people were entitled to pensions in 2020. By 2028, this number is expected to increase by a good seven percent. It’s not just the number of retirees that drives spending. Increasing life expectancies also cause higher costs.

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Also read: When is it worth becoming a civil servant?

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