Following a heated debate in parliament last week on the Berlin government’s plans to cut unemployment benefits, German Chancellor Gerhard Schröder on Sunday announced more harsh measures concerning the country’s statutory pension system in a bid to decrease non-wage labor costs and support economic recovery after three years of near-recession.

It’s a well known and disturbing fact that Germany currently suffers from a steadily ageing population and the longest period of economic stagnation in its post-World War II history. This has put an enormous strain on the country’s generous statutory pension system, to the point that, without any reforms, experts say the system would run up a deficit of at least 8 billion euros in 2004.

The Berlin coalition government of Social Democrats (SPD) and Greens want to plug this hole by putting a freeze on pensions next year. It also wants pensioners to carry the full cost of nursing insurance themselves.

Plugging long standing holes

Critics of the scheme, who debated the issue during a summit meeting of cabinet ministers and parliamentarians recently, accuse the government of continually reaching into poor people’s pockets, making them pay for budget holes that should have been plugged long ago.

Despite the growing concern and opposition, SPD and Greens leaders also agreed a third step at their meeting on Sunday. Pensions will in future be paid out at the end of each month and not at the beginning, as is common practice at present. In effect, this will leave elderly people with a month’s pension less. Schröder said on Sunday that these harsh measures were indispensable in the fight to keep pension contributions stable at 19.5 percent of gross earnings.

No other alternative

“In 2004 we cannot afford to pay out higher pensions. Nobody regrets this more than I do, but the country’s economic and demographic realities leave us with no other alternative but to freeze pensions at their current level,” Schröder said in a statement. “There’s agreement in the government that we have to do everything not to increase non-wage labor costs. Otherwise we’d send out a devastating signal to employers and investors.”

One of the most controversial and widely discussed issues of the proposed pension reforms, raising the official retirement age by two years, was largely dodged at Sunday’s summit. But Schröder indicated that such a proposal was still on the table and would be debated in due time.

Internal unrest

Schröder faces internal unrest over the proposed scheme. Social Democrat left-wingers view the proposed measures as a betrayal of their party’s long-standing social principles, saying that more and more citizens have stopped considering the SPD to be an advocate of ordinary people’s interests.

Unsurprisingly, the chancellor is also under fire from the opposition conservatives, including Christian Democratic Unions chief Angela Merkel. "The bottom line is that next year pensioners will have less in their pockets. Talking about a mere freeze is only a half-truth," Merkel said.

"Let’s not forget that pensioners will now also have to pay full nursing insurance premiums. This will be hard for those who already have to turn over every penny before spending it." She also voiced her doubts whether the government’s proposed "patchwork policy" would help in the long run.

Still, proponents see the move as a further example of the readiness of the German government to make difficult cuts to the social system in order to spur slumping economic growth, even if the moves are unpopular with voters.

Trade unions blame government

The German trade unions umbrella organization, DGB, has also criticized the government for what it sees as the punishment of pensioners for three years of failed economic policies and the resulting sluggish growth.

“In a situation like ours, it seems absurd to seriously consider raising the official retirement age by another two years," said Ursula Engelen-Kaefer, the confederation’s deputy chief´. "People find it hard to get a job when they’re 50. Who wants them on the labor market until they’re 67?”

Pensioner's set to take action

The pension reform plans are also putting Schröder on a collision course with the national pensioners’ association, the VdK. The association’s chief Walter Hirrlinger warned that the government would feel the anger of the country’s 20 million pensioners, announcing large-scale protest actions. “Pensioners will know how to react at the ballot box,” he added.