Germany's invisible debt: Expert calls for pension cuts

Created: 01/03/2023 04:53

By: Andreas Hoess

Economist Bernd Raffelhüschen warns of Germany's invisible debt.

© Gregor Fischer/dpa

Germany seems to have its public finances under control.

In the future, however, so-called invisible debts such as rising pensions could become a burden.

Munich – When it comes to its public finances, Germany likes to see itself as a model student.

In 2012, when Greece was on the verge of bankruptcy, the Germans pointed the finger at the southern Europeans, who had apparently lived beyond their means.

However, if one also includes obligations such as pensions, which will rise sharply in the next few decades, in addition to the national debt, Germany's fiscal situation is now more precarious than that of the former problem child, Greece.

At least that's what a study by the employer-friendly Stiftung Marktwirtschaft from the end of 2021, based on data from the EU Commission, suggests.

"Europe is getting older": Germany's invisible debt

"Europe is getting older and the group of elderly people is therefore growing," the authors around the Freiburg economist Bernd Raffelhüschen explain their approach.

"As a result, increasing expenditure on pensions, care and health can be expected." However, only very few countries are well prepared for the age-related cost explosions.

That's why Raffelhüschen and his colleagues have screened all EU countries for unfunded demographic spending, which they call "invisible" or "implicit debt" that could throw Europe's national budgets into turmoil by 2070.

"Their financial dimension is fatally underestimated, while the implicit debts in many countries clearly overshadow the explicit ones."

The example of Greece shows how strongly these invisible debts influence a country's fiscal valuation.

When it comes to the overall financial situation, Greece is surprisingly Europe's best-in-class.

At the time the data was collected, the Greeks still had enormous government debt, accounting for 181 percent of economic output.

In return, Athens had to commit to drastic savings, pension cuts and cuts in the health system in order to receive financial aid.

That was painful.

According to the authors, however, Greece should benefit from the drastic cure by 2070 with a financial surplus of 355 percent of economic output.

It is significantly higher than the national debt and even gives the supposed debt state a positive balance in the long term.

Only Estonia and Croatia are in a similarly solid position.

Germany's invisible debt: rising pensions and social spending as the cause

Germany, on the other hand, is in danger of slipping further into the red due to the high level of implicit debt.

Here the authors add 105 percent invisible debt to the 60 percent national debt, because the country will probably not be able to cover its pensions and social spending, which are increasing due to age, with the expected income.

The bottom line is that the total German debt is 164 percent of economic output, which is even higher than that in Italy, Cyprus or Portugal.

These countries also had to implement reforms and cuts during the debt crisis.

Whether they really stabilize their finances in the long term depends on whether they stick to the reforms - and here the authors are very skeptical.

also read

Electricity prices down: Germany is giving away energy abroad – but there is good news

READ

One-off payments, more wages and child benefit: there's so much from the state now

READ

Property tax will rise drastically as early as 2023 – which state will be hit hardest

READ

Pension of 1200 euros: What is really left for pensioners in Germany

READ

Pension is increased: Table shows how much more money there will be in 2023

READ

Fancy a voyage of discovery?

My space

Incidentally, Slovakia, Romania, Luxembourg and Slovenia, which, like Germany, have relatively low explicit debt, do particularly poorly in the evaluation.

If you add the implicit debt, the total debt there is between 500 and over 700 percent of economic output.

That is far above the EU average of 192 percent, which is close to the German value.

Expert Raffelhüschenc calls for pension cuts

"EU citizens are getting older, the group of older people is growing and birth rates are stagnating at a low level - that will be expensive for the member states," summarizes the authors around Raffelhüschen, who is repeatedly criticized, employers' associations and the insurance industry to be close.

The aim of the EU must be a reform of the social systems and pension cuts.

"In practice, this could be implemented by indexing or linking pension payments to life expectancy, which should not be delayed, but come into effect as early as possible."