Every year in the spring, I get post from the „Deutsche Rentenversicherung Bund“, providing information about my future state pension. What the letter says is scary.
First of all, it reminds me that I will have to work until 2037 (I will be 67 by then) to get my full pension. OK, I like working, but can I really trust the state that 2037 stays 2037, and doesn’t become 2040 (I will then be 70), or 2045 (I will then be 75)? Hardly, because there is still plenty of time for future governments to change the rules of the game until then.
And they will! The German population is stagnating, and getting older and older (the current median age is 47, i.e. 50% of the population is older than 47…). So there will be more pensioners, and fewer people in work. So the state won’t be able to keep its promise: pensions are paid by people in work, nobody else.
Second, in this letter, there are plenty of numbers about my future pension, but the most important one is the „Höhe Ihrer künftigen Regelaltersrente“. This number is clearly below €1000 in my case, way below €1000 (I am an average guy). Let us call it ‚R‘. ‚R‘ tells me how much pension I can expect based on the contributions that my employers and I have made into the state pension system so far. These contributions into the pension pot are shown at the back of the page. When I sum them up, I get a number that is well above €100 000. Whoa! I am rich (that’s an illusion). Let us called this number ‚PAID‘. And when I divide ‚PAID‘ by ‚R‘, then I get a factor of about 200.
If you have never made the calculation yourself, then stop reading IMMEDIATELY and go in check, in your personal statement from the „Rentenversicherung Bund“, what the situation looks like for you. You will probably be as surprised as I am.
‚PAID‘ is telling me that my various employers and I have paid into the state pension more than €100,000 so far. Amazing. But don’t forget that the money is gone already. This is not money that belongs to me, but money that has been disbursed to current retirees already. So as far as I am concerned, the money is gone: it has been spent already and is not there any longer. It is only a reminder of the amounts that I have paid into the system already. Nothing more.
Third, the ‚200‘ factor comes from my life and retirement expectancy. People who retire today (born in 1950) are expected to live until they are 83 years old (men) and 87 (women), so say 85 years old on average. That means 18 years of retirement x 12 months = about 200 months.
Forth, a state pension lower than €1200 is not much. Can you currently live with €1000 per month? I can’t.
Now, if you don’t believe me, then here is another proof, provided on the web site of the Deutsche Rentenversicherung. The formula for your future pension is as follows:
Monatliche Rentenhöhe = Entgeltpunkte x Zugangsfaktor x Aktueller Rentenwert x Rentenartfaktor
If you are an average guy and earn an average salary, then you will get 1 Entgeltpunkte for each year you have worked and paid into the pension pot.
If you don’t retire early, then Zugangsfaktor will be 1, and Rentenartfaktor will also be 1. The formula becomes:
Monatliche Rentenhöhe = Entgeltpunkte x Aktueller Rentenwert
As at October 2016, the ‚Aktueller Renterwert‘ is 30,45 EUR for (West-)Germany. If you work 40 years until retirement, with an average salary you will get 40 Engeltpunkte.
So your pension will be: 40 x 30,45 =1218 EUR. That’s it!
If you still don’t believe me, here another proof: to get an average pension of 1200 EUR, you and your employers will need to pay about 200 x 1200 = 240 000 EUR into the pension pot. If you work 40 years, that means making pension payments of 6000 EUR every year. The ‚Beitragssatz zur Rentenversicherung‘ is currently 18.7%, shared equally between you and your employer. So 6000 EUR pension contribution per annum means an annual salary of 31750 EUR. That’s the average gross salary in Germany in 2016. If you earn less, then your contribution will be lower, and you will get fewer Entgeltpunkte, and your state pension will be lower than 1200 EUR.
Scary, but real.
Maybe it is time to act, and become a MyMoneyWorks member, to learn how to sweeten your pension.