Loud silence on pensions as German election nears: Politicians avoid talk of welfare reform, but the country is facing a harsh demographic squeeze. Report by John Eisenhammer

AS NEXT month's German election draws near, all talk of pensions has been banned. A slight indiscretion recently provoked a mighty rebuke from the Chancellor, Helmut Kohl, about unwarranted alarmism. His Social Affairs Minister, Norbert Blum, simply declared: 'Pensions are safe.' For how long, he did not say, but it will certainly come up again once the election is over.

'The simple truth is that for anyone under 50, assurances that the financial basis of state pensions is secure are foolhardy,' says Stephanie Wahl, of the Institute for Economic and Social Studies in Bonn.

In Germany today the proportion of over-60s is 20 per cent; by the year 2030 it will be over a third. In a recent report, The Elderly of the Future, the government said that with a pensionable age of 60, there would be just 100 people working to sustain benefits for 80 pensioners in 35 years.

Germany is not alone in contemplating such dramatic changes. Throughout the Western world, a similar demographic trend is forcing a rethink about the affordability of the traditional 'fully comprehensive' state welfare system. But in Germany this demographic squeeze is particularly harsh. Its population grew in the post-war baby boom more prolifically than most, only to fall away sharply. 'Regardless of this debate on pensions reform . . . there is no getting round the fact that people will have to pay more in provisions, or receive less benefits. There will just be too many old people', says Mrs Wahl. 'The real issue is which arrangements are going to be best for the growth potential and competitiveness of an economy.'

Recent developments have highlighted this problem. Unification provided the first shock, as an already creaking West German welfare system suddenly inherited 17 million new members, many of whom had made little provision for the generous benefits they now receive. A third of German gross domestic product goes on social spending. In 1960, West Germany's proportion was just under 23 per cent. Combined social insurance costs have risen from 26.5 per cent of gross pay in 1970 to more than 40 per cent now. This strain on public spending - caused by the need to integrate the east - was amplified by the recession as unemployment surged. But it is perhaps a third development that has done most to focus the debate of welfare reform - Pflegeversicherung.

This new insurance scheme for nursing the aged and chronically ill, which starts next January, extends the scope of the welfare state and places an extra 1 per cent contribution on gross wages. While employers are to be compensated by the abolition of a public holiday, the financing of the new scheme highlights the problems of an income-based welfare system where increased contributions are immediately reflected in higher wage costs. Germany has relatively high, but not excessive, basic wages. It is the additional charges, notably social insurance contributions, that give it the highest labour costs in the world.

The past two years have seen a heated debate about the urgency of improving the competitiveness of German business by reducing the wage cost burden. By doing precisely the opposite, the Pflegeversicherung scheme produced a chorus of protest from industry. But once the election is over, industry's campaign to cut additional labour costs will resume, focusing pressure on the state's ability to sustain a comprehensive welfare responsibility.

Current pension contributions amount to about 19 per cent of wages, divided 50:50 between employer and employee. By 2030, they will need to rise to 27 per cent, according to official estimates. If the expected contributions for health, unemployment and Pflegeversicherung are added, the overall proportion amounts to over 50 per cent of wages, and that is before income tax.

'If you think about the effect on incentives to work, and business competitiveness, then these are impossible figures,' says Dieter Brauninger, of Deutsche Bank Research. 'It is not so much ideology as arithmetic that will move the balance from state to private pension provision.'

While neither of the main parties on the right nor the left appears willing to contemplate talk of radical pensions reform, there is no lack of independent analysts saying this is inevitable, as the current system is heading for bankruptcy. The only solution, critics say, is to encourage private provision by freeing and improving the regulations of a system that favours house buying and life assurance, but little else, so that state pension care can be reduced to a basic level, say 40 per cent of former earnings.

'This would get away from the high-wage cost problem which is killing industry, creating a more dynamic, flexible system encouraging economic growth,' says Mr Brauninger.

But the present state system is not without defenders. Professor Winfried Schmahl of Bremen University, and head of the permanent advisory board on pensions to the German government, opposes a radical departure from the income- based, comprehensive state system. 'If present contributions were used only for pensions, and not diverted into other aspects of wealth redistribution, which should come from taxes, then much of the projected rise in contributions would not occur,' he argues.

Comparing today's contributions with those in 2030 looks dramatic because of the assumption nothing will change. 'Of course things must change, but the current system is sustainable. One could look at more differentiation in benefits, extending the working life, and perhaps some overall reduction in benefits,' he says.

Otto Mayer, of the Hamburg Institute of Economic Research, also suspects benefits will end up being reduced. But he argues that radical reformers, particularly those urging private provision, ignore the political dimensions of a process that will demand a 40-year transition.

'Some people are better at saving than others, which means politicians must fear one day facing a lot of discontented people and demands to raise basic pensions,' he argues. 'The future of pensions is only partly about economics. It is also about what is politically possible.'

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