At the Nexus of Social Policy and Capital Markets: Pension Reform and Enterprise Governance in Germany



Political efforts to reform existing pension systems are among the most significant examples of institutional change occurring in the advanced countries. Pension reform portends far-reaching shifts not only for the economic security of elderly citizens, but also for industrial relations and the structure of capital markets. In both respects, any significant change in a national pension system exerts powerful force on patterns of enterprise governance. Insofar as they are linked to an individual’s employment history, pension policies can serve as powerful ties that bind employees to a particular firm. Insofar as they become reservoirs for current savings, pension systems contribute, sometimes massively, to an economy’s supply of “patient” capital available for long-term investments.

This paper examines recent changes in German pension arrangements as a way of illuminating the ability of Continental Europe’s largest democracy to adjust its institutions to changing demographic and competitive conditions. At first glance, the recent changes in Germany’s pension system look like a clear shift away from the solidaristic elements of the country’s inherited Bismarckian institutions for old-age insurance. As the policy process moved forward, however, societal pressures coalesced around less individualized arrangements and began to emphasize firm-level of industry-wide agreements between employers and employees. What initially appeared to be a surprisingly market-oriented reform quickly evolved toward arrangements that preserved the principle of negotiated agreements at the firm- and industry levels, even as the financing arrangements hinged on pre-funded (or in American terms, defined-contribution) accounts. The effect was to give Germans new ways of investing for old-age security, but to maintain much the same balance of societal power that had shaped earlier shifts in Germany’s pension system.

The underlying issue that triggered the recent case of reform was an anticipated crisis in financing the future benefit claims from Germany’s statutory or “public” pension system. The statutory pensions were financed through Pay-As-You-Go (PAYGO) payroll deductions that rested on an intergenerational contract between current employees and current retirees. The solution reached in Germany (as in several other countries) was to create new options for supplemental retirement accounts that would be pre-funded or capitalized (kapitalgedeckte), thereby reducing the anticipated pressures from future retirees to maintain benefits from the statutory PAYGO system at unsustainable levels. As a number of alternative designs for the fully funded (defined-contribution) accounts appeared, the reform effort began to reveal how contending social groups would assess the appeal of funded pensions at different levels of aggregation and with different levels of government support.

In analyzing the different responses so far, this paper proceeds in four steps. The first section outlines the theoretical questions illuminated by this case of reform. The second section begins the empirical analysis by summarizing the German pension system as of the early 1990s. The third section explains how the idea of individualized accounts gained momentum as a solution to the dilemmas faced by Chancellor Gerhard Schroeder’s Red-Green coalition between 1998 and 2000. The fourth section traces the emergence of support for vehicles that would structure defined-contribution plans at the enterprise- or industry-level rather than through separate individualized accounts. The fifth section discusses how the initial political maneuvering around these different options continued in the implementation or “post-enactment” phase of the policy discussion. The paper concludes with reflections on the mechanisms that enabled German politicians to open a range of institutional alternatives including individually funded pensions, but that subsequently came to emphasize solutions to be negotiated in firm-specific and industrywide arenas – levels of aggregation more in keeping with Germany’s prior arrangements for old-age insurance.