Germany’s new pension top-up: Is the future of state pensions means-tested?

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After months of negotiations, Germany’s coalition government has agreed on a new top-up pension, which will benefit around 1.5m people and cost €1.5bn. Is this a step towards more means-testing in Europe’s state pension systems? 
“If, having worked all their lives, people find themselves dependent on welfare, it destabilises the very foundations of society,” wrote Sueddeutsche Zeitung, welcoming the new form of top-up pension announced in Berlin on Sunday. 

Pension or benefit?

Germany’s new Grundrente will be available from 2021 for new and existing pensioners on low incomes, predominantly women. 

German newspapers consider that the compromise has saved the grand coalition – consisting of CDU, its partners at CSU and the social democrats (SPD), who had originally wanted the pension to be available to everyone; instead, the parties have now agreed, however, to make it a means-tested benefit. 
This raises the question in how far the top-up differs from working age benefits, other than that it is earmarked for pensioners; Badische Zeitung notes that the new Grundrente links the pension and benefit systems, calling it a difficult operation. The German government is seeking to avoid negative interactions between the top-up pension and the eligibility for housing benefits, for example. 
In the UK, pension credit performs a similar function to the Grundrente, being an income-related pension top-up, and the introduction of the benefit in Germany is not revolutionary or even unusual in that sense.

The OECD, a Paris-based ‘club’ of mostly rich nations, had in the past criticised Germany for not doing enough for its low-income pensioners. Old age poverty can lead to extreme actions, as old people feel they have little to lose. The case of an 82-year-old dealing cocaine in Munich to improve his situation can be seen as a case in point. 
But while the Grundrente is not new as a concept, it does represent a further step towards means-testing in a state pension system – and it is happening in Europe’s most influential member state.  
The OECD has previously recommended that the UK should means-test its state pension, scrapping for the richest retirees. The UK currently has one of the least generous state pensions among OECD countries, replacing less than a third (29%) of pre-retirement income. Pensioner poverty has decreased but many expect this trend to reverse once more people retire on DC pensions.  

So what are the pros and cons of means-testing?  

Australians enjoy a means-tested state pension and a well developed defined contribution pension system. But there is a small problem with means-testing and DC – essentially a (tax-advantaged) savings and investment account – which is the fact that unlike an annuity or DB, it can be depleted. Depletion is, some would say, incentivised by a means-tested state pension. 
Without means-testing though the poorest in society might wonder why they pay into the state pension system. As SZ’s Hendrik Munsberg argues, working age people on low incomes are practically invited to dodge the system where the state pension is insufficient; why should they contribute to a system that does not work for them given they will need to rely on welfare anyway?  

What do you think about means-testing pensions?  

Ian Neale
Tim Smith
Gregg McClymont
Joe Dabrowski