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Facing the Challenges of Our New Demographies: Pension and Healthcare Reform in Germany and the United States

Germany and the United States have developed individual approaches to the provision of pensions and healthcare reflecting choices about the burden to be borne by employees, employers, and government. Both share the goal of maximizing efficiency and equity through targeted policy changes. A comprehensive report by the Washington-based American Institute for Contemporary German Studies (AICGS) at The Johns Hopkins University comparing healthcare and public pension reform in each country highlights how they both tackle challenges in these areas.

The following summary cites some of the AICGS report’s key findings.

PENSIONS: Retirement age raised in Germany

Seniors like these cyclists taking in the view at the Lake of Constance can look forward to secure retirement in Germany following key reforms to the country’s pension system. Photo: dpa

Germany has undertaken a fundamental reform of its public-pension program, including the introduction of partial privatization.

The Pension Insurance-Retirement Age Adjustment Act (Rentenversicherung-Altersgrenzenanpassungsgesetz), passed by the German Parliament in March 2007, enacted a stepwise increase in the official retirement age from 65 to 67 between 2012 and 2030.

“Pensions must be secured in a sustainable financial fashion for future generations because of increasing life expectancy and a decline in birth rates,” said German Chancellor Angela Merkel, who called it “a decisive step in forging durable pensions for the future”.

Structure of the German and American public pension systems

President Franklin D. Roosevelt signed the Social Security Act into law in 1935, and the US government paid its first monthly benefits in 1940. Germany’s public-pension system was established by Chancellor Otto von Bismarck in 1889. Overhauled in 1957, the system is the oldest comprehensive social security system worldwide.

Similar in type, both systems are pay-as-you-go programs that depend principally on payroll taxes for funding and rely on past earnings to set benefits. They differ in specifics, including the cost of the program as a share of GDP (larger in Germany); the generosity of benefits (higher in Germany); the degree of redistribution (higher in the US); and the breadth in the base of contributors.

From Riester to Rürup: key reforms of the German system

The Greenspan Commission and new legislation introduced in 1983 ended fiscal perils facing the US social security system and expanded the Social Security Trust Fund, but retained the pure pay-as-you-go method of funding public pensions. Germany, by contrast, introduced a defined contribution component and a “sustainability” factor based on changes in the dependency ratio to its PAYG pension regime.

Successive reforms began in 1992, to help integrate eastern German retirees into the western German pension system. These were followed by the 1999 Pension Reform Act (Rentenreformgesetz, RRG ’99) and the more far-reaching 2002 Old-Age Assets Act (Altersvermögensgesetz, AVmG). It became known as the “Riester reform”, because the labor minister at the time, Walter Riester, spearheaded its development and passage.

Most innovatively, the 2002 reform introduced a range of voluntary state-subsidized private retirement savings options that are intended to help counterbalance the reduction of the replacement rate. The private options, known collectively as the “Riester pension” (Riesterrente), fall into two broad categories: individual and occupational retirement accounts.

At the same time the Rürup Commission – chaired by Bert Rürup, head of the German Council on Economic Advisers (Sachverständigenrat) – made a range of key recommendations, including raising the retirement age to 67 and a “stability factor” that would adjust pension benefits inversely with changes in a standardized estimate of the dependency ratio of retirees to the employed in order to contain costs. This was introduced in the 2004 Old-Age Pension Insurance Sustainability Act (Rentenversicherung-Nachhaltigkeitsgesetz).

A promising future for the German public pension program

The combination of the Riester pensions, the sustainability factor, and a later retirement age offer promise to provide for the German pension regime in the long run.

The German experience could be interesting to follow for many other countries also exploring changes to their own pension systems. For example, ideas such as the sustainability factor may look very attractive economically and politically for pension and Medicare-style programs in other countries as a means to contain costs.

HEALTHCARE: Healthcare systems in Germany and the United States

Experts agree that preventive medicine in the form of healthy lifestyles including exercise, such as Nordic walking like this group of women in Germany, is the best way to “keep the doctor away”. Photo: dpa

In Germany, historically the “inventor” of universal health insurance, core elements of healthcare finance can still be traced to the initiation of mandatory pay-as-you-go sickness funds by Chancellor Otto von Bismarck in 1883.

The German system has been shaped by other forces than healthcare in the US, where the health insurance market operates like other insurance markets. It now covers about 90 percent of Germany’s population, with private health insurance serving most of the rest.

Healthcare reforms in Germany and the United States

The Law for the Strengthening of Competition in Legal Health Insurance (Gesetz zur Stärkung des Wettbewerbs in der gesetzlichen Krankenversicherung, GKV-WSG) came into effect on April 1, 2007. It aimed to make having health insurance mandatory for all Germans, to increase the range of insurance options, and to improve the quality and efficiency of care.

It also extended the mandate of the fledgling Cologne-based Institute for Quality and Efficiency in Healthcare (Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen, IQWIG) so that it not only assesses the benefits of new drugs, but also their costs. This is likely to set an example for other issues in technology adoption and economic evaluations of technologies and services in the future.

A new deal for healthcare

The AICGS report concludes: The right incentives for the development of new medical technology and their implications for equity in access are global issues and the convergence of two of the largest players in the global health care market can only be viewed as a universally beneficial scenario. By evaluating best practices, both countries must recognize the international linkages and systemic interdependence, especially in the generation and diffusion of new medical knowledge and technology. The learning and recognition of this international interdependence may ultimately lead to a common agenda.

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