Reform Context

The German public retirement pension system was organized according to principles established when the system was created in 1889 and elaborated by the major reform enacted in 1957.^{Footnote 21} First, the GRV is an insurance plan. Eligibility for benefits derives from paid employment that enables the insured to make contributions to the plan’s finances.^{Footnote 22} Participation is compulsory for all those in dependent employment whose incomes fall below a specified annual amount. Moreover, benefits are paid when the covered risk is realized. There are no means tests and there is no administrative discretion when granting benefits. Second, the equivalence principle dictates that benefits are scaled to contributions. The mechanism for accomplishing that was substantially modified in 1957 through the introduction of “dynamic pensions.” It consists of two parts: a formula for calculating initial benefits and another that adjusts benefits annually. The initial pension calculation made at the time of retirement revalues the contributions made by the insured throughout their entire working lives to reflect the monetary values and pay levels extant at the time of retirement. It is intended to offset the effects of unfair pay practices, particularly toward women, and past inflation. In addition, an annual adjustment to running pensions raises benefits to conform with income changes throughout the period of retirement. These two formulas are intended to ensure that retirees maintain their relative economic and social positions after leaving the workforce. Third, revenues are obtained based on the principle of parity. Employees and employers contribute equally to the system accompanied by a subsidy from the central government.^{Footnote 23} Fourth, the funding mechanism is based on the contract between generations. The GRV is financed using a modified pay-as-you-go system. Current revenues are used to pay current benefits with only a small reserve designed to bridge short-term revenue fluctuations. The current working generation pays the pensions of the retired generation with the expectation that its children will finance its benefits. Fifth, it was generally accepted that the pension system should consist of a single government pillar. While private pension plans existed in the form of life insurance and employer schemes, they played only a small role. A sixth principle was the corporatist organization of the pension system. While the government set policy, the implementation of that policy was assigned to semigovernmental insurance institutes organized according to occupation. The insured participate in the operation of those organizations through an institution called self-administration (Selbstverwaltung). It includes the election of representatives of the insured to assemblies that enables them to express their opinions on pension policy. Finally, the principle of solidarity provides that all participants contribute at the same rate irrespective of age, occupation, or gender. That same principle dictates that the GRV is used to deliver some benefits that are not related to the risks that it covers. The federal subsidy is intended to cover the cost of those transfer payments. The Riester-Reform substantially modified four of the seven principles. It limited the extent to which benefits were scaled to income, broke with the principle of parity financing, substantially altered the effort to maintain retirees’ social standing, and replaced the single pillar with three.

Two fundamental sets of difficulties caused the political leadership of the Federal Republic to reform the pension system. One, the demographic problem, had been developing since the late nineteenth century. It came to a head in 1971, when the number of people who died climbed above the number born, where it has remained ever since.^{Footnote 24} In that year, the total fertility rate (TFR), which measures the number of births that a mother has during her child-bearing years, fell to 1.92. A rate of 2.1 is the minimum necessary to maintain the size of the population. Since the 1980s the TFR has been hovering around 1.4.^{Footnote 25} Simultaneously, life expectancy has substantially increased. In 1889, life expectancy at birth for men was thirty-six years, for women thirty-eight years. By the early 1990s it had reached 72.9 and 79.9, respectively.^{Footnote 26} A consequence of this development was that retirees collected their pensions longer than ever before. In 1960, they received benefits for an average of 9.9 years. In 1998, they collected their pensions for an average of 15.9 years.^{Footnote 27} Adding to the burden on the pension system was the fact that the government encouraged early retirement as a means of fighting unemployment. In 1998, of the 1.05 million people who retired, only 22.8 percent did so at the statutory retirement age of sixty-five. The result was that the average retirement age for all reasons was just 59.8.^{Footnote 28} A measure of the financial strength of a pension system is the ratio of people contributing to the plan to those drawing benefits from it, called the dependency ratio, sometimes called the pension ratio. For a PAYGO financed pension plan to function smoothly, a dependency ratio of at least 3:1 is necessary. In 1998, the ratio was just 1.45:1.^{Footnote 29} Clearly, in light of its low dependency ratio and the long-term demographic trend, the German pension system faced serious financial problems.

Those problems were reinforced by economic developments. PAYGO systems are directly affected by changes in employment and income. Economic growth, high employment, and rising incomes create favorable conditions for the operation of a PAYGO pension system. In the early years of the Federal Republic, those conditions existed. However, since the early 1970s they have not. Economic growth slowed from an average of about five and a half percent per year in the 1960s to just one and a half percent per year between 1992 and 1998.^{Footnote 30} At the same time, unemployment increased. From less than one percent in the late 1960s, it rose through the 1970s and 1980s, remaining over ten percent from 1996 through 1999.^{Footnote 31} High unemployment reduced the number of people contributing to the pension system and increased the number of retirees drawing benefits from it. The result was that the GRV’s finances were squeezed from both the revenue and expenditure sides. At the same time, the stock market boom of the 1990s seemed to indicate that greater reliance could be placed on capital-based financing.^{Footnote 32} Other European countries, notably Britain, Sweden, Switzerland, and the Netherlands, had added market components to their retirement systems to take advantage of the boom.^{Footnote 33}

The rise of low-cost competitors in Asia and Eastern Europe also threatened the GRV and the German social insurance system as a whole. The combination of taxes and social insurance contributions made German labor costs the highest in the world.^{Footnote 34} German business feared that those costs would make its products uncompetitive on world markets. Germany’s exports would fall causing unemployment. That, in turn, would magnify the GRV’s financial problems. Therefore, business called upon the government to reduce social insurance contribution rates, the highest of which was that of the public pension system.

The demographic and economic problems facing the Federal Republic had existed for decades and had been recognized at least since the 1980s. Yet, for all of the legislative activity, the underlying problems remained. The pension policy elite and the dominant politician of the era, the Christian Democrat Helmut Kohl, did not share the neoliberal ideas of Margaret Thatcher and Ronald Reagan. They were prepared to cut benefits but thought that adding a private capital-based pillar to the pension edifice was too risky. The defeat of Kohl in the 1998 parliamentary elections and his subsequent disgrace due to a financial scandal removed a major obstacle to implementing a market-based reform of the pension system. It enabled advocates of such a reform within the CDU to gain influence. It also increased the leverage of the market-friendly Free Democrats.

Simultaneously, a new generation of leaders arose in the Social Democratic Party that was sympathetic to market-oriented solutions. Compared to the 1950s and 1960s, the number of SPD members of the Bundestag who had backgrounds in social and labor organizations such as unions and works councils had declined. They were replaced by people who regarded holding elected office as their primary occupation.^{Footnote 35} Foremost among these professional politicians was Gerhard Schröder.

Schröder did not follow the traditional path to admission among Germany’s political elite. He was born in the small town of Mossenberg in northwest Germany on April 7, 1944. His father was killed six months later fighting on the eastern front. He was raised by his mother, at times in poverty. He attended local schools and later received a high school diploma and bachelor’s degree from night school. He earned a law degree in 1974 and entered legal practice. From his youth, he harbored a deep resentment against those who enjoyed privilege and joined the SPD because of its commitment to achieving social equality. He quickly rose through the party in the state of Lower Saxony during the 1980s, becoming its minister president in 1990. During this time, he made the acquaintance of many business people, including the leadership of Volkswagen, of which Lower Saxony was part owner.^{Footnote 36} Indeed, he developed such close relations with prominent business leaders that some members of the press dubbed him the “comrade of the bosses (Genosse der Bosse).”^{Footnote 37} The result was that, although he remained committed to core social democratic principles, Schröder also adopted ideas favorable to business and competitive markets that would promote employment and income growth. By the mid-1990s, Schröder advocated a policy that he called the “New Center (Neue Mitte).”^{Footnote 38} He thought that the SPD had clung to too many old ideas from the 1950s. It especially did not take demographic developments sufficiently into account.^{Footnote 39} On March 10, 1999, he told his cabinet that he wanted a policy that was not hostile to business. He wanted the SPD/Green coalition to have a good relationship with entrepreneurs, big business, and Germany’s famous “Mittelstand,” a group of innovative midsized companies that created many well-paying jobs.^{Footnote 40} Shortly after, he asserted: “There is no left or right economic policy, rather only a modern or an antiquated one.”^{Footnote 41} He appealed to the “New Center” groups in the party and society, people who were highly educated, innovative, entrepreneurial, and decidedly not blue collar.^{Footnote 42} Schröder had made his policy toward the pension system clear in a memorandum published as early as September 19, 1997, called the Dresdner Theses. Without naming him, he quoted Friedrich von Hayek’s view of competition as a discovery process and praised the effects of incentives in a competitive market. Again alluding to Hayek, he called for releasing the society’s “self-steering powers” and for reducing the role of the state. He proposed preserving the existing pension system but supplementing it with more private retirement saving and worker ownership of capital.^{Footnote 43} He later characterized this as merely a new balance between solidarity and self-responsibility.^{Footnote 44}

Schröder chose as his campaign manager for the 1998 parliamentary elections another man who had followed an unconventional path to the top of German politics. Bodo Hombach was born in 1952 in Mülheim an der Ruhr and initially pursued a career as a telephone repairman. He later also attended night school, ultimately earning a bachelor’s degree in social work. He had early joined the postal workers union and entered the state parliament in North Rhine-Westphalia, a citadel of social democratic and union power. He became a campaign adviser to, among others, Nelson Mandela. In 1998, he published a book in which he described the ideas that the Schröder government would follow. Excerpts were published in the influential newsweekly, Der Spiegel. He asserted that the GRV was no longer capable of assuring the social status of retirees. Therefore, a supplemental private savings plan was necessary, while the government pension system would be reduced to delivering only basic benefits. He explicitly proposed creating a multipillar pension system, and called for the creation of an “activating state” that would promote employment. Remarkably for a Social Democrat, he asserted that “Any job is better than none.”^{Footnote 45}

While preparing his campaign for the 1998 parliamentary elections, Schröder sought someone who shared his iconoclastic ideas to help him reform the pension system. He found that man in Walter Riester. Riester shared many of the characteristics of Schröder and Hombach, most especially ambition and independent, not to say idiosyncratic, thinking for a Social Democrat. Riester was born on September 27, 1943, in Kaufbeuren in southern Bavaria. His mother separated from his father, a soldier, during World War II. Like Schröder, he was raised by his mother. From the late 1950s through the late 1960s, he worked as a layer of floor tiles. Like Schröder and Hombach, he took an unusual educational path, attending schools operated by the German Union Federation (Deutsche Gewerkschaftsbund). He worked his way up through the union hierarchy in Baden-Württemberg, a center of the West German metal-working industry, home to firms like Daimler-Benz and Porsche. By 1993, he had become vice president of the powerful metal workers union, IG Metall, responsible for contract negotiations.^{Footnote 46} Riester joined the SPD in 1966 but regarded it as too conformist, a party for professors and lawyers.^{Footnote 47} Indeed, Riester had emerged from the union educational system as an adherent of the far-left state-monopoly-capitalist (Stamokap) interpretation of history. However, in negotiating labor contracts, he had shown himself to be innovative and not bound by party tradition. As labor minister under Schröder, his position was comparatively weak. He owed his appointment to and derived his leverage in office from Schröder. He did not have his own constituency in the labor movement and, indeed, was at odds with the IG Metall leadership when he left it to enter politics.^{Footnote 48} Like Schröder and Hombach, Riester was very ambitious. Like many other members of the SPD, he wanted the party to regain control of the cabinet and was willing to adopt new policies to make that happen.

Riester accepted the basic premises of the conservative critics of the pension system. However, he did not think that their reform proposals went far enough. He was convinced that the GRV was finished and, unlike many on the left, that the demographic problem was real. Riester suggested that a small percentage of employee pay be diverted by employers into private individual savings accounts. They would accumulate capital that would grow thanks to compound interest. The result would be a fund that would enable workers to retire at age sixty, which he thought would take pressure off of the labor market and still enjoy pensions sufficient to maintain their social standing.^{Footnote 49}

The campaign leading to the parliamentary election of September 27, 1998, was dominated by pension issues. The sitting coalition lead by Helmut Kohl and the Union parties had passed a law to reform the pension system in 1997. It added a “demographic factor” to the annual pension-adjustment formula designed to slow the growth of pension benefits as life expectancy rose. The SPD promised to reverse this policy and to use subsidies financed by a new ecology tax to lower the GRV contribution rate. The Social Democrats and their Green allies won the election, triggering a massive dispute within the SPD over pension policy.^{Footnote 50}

The Social Democrats had traditionally advocated increasing benefits and reducing the retirement age. That policy was championed by their social policy expert Rudolf Dreßler. In May 1997, Dreßler had chaired a committee that drafted the party’s pension platform for the upcoming election campaign. It featured a rejection of any reduction of the replacement ratio for demographic reasons, meaning that the “demographic factor” would be repealed, and an expansion of the risk pool to solve the GRV’s financial difficulties.^{Footnote 51} Dreßler denied that there was a demographic problem and contended that the pension system’s financial position would be righted when unemployment fell.^{Footnote 52} The differences between Dreßler, on the one hand, and Schröder, Hombach and Riester, on the other, were papered over until after the election. Then a bitter policy dispute erupted between the traditionalists and the “modernizers” within the SPD. The Greens were less interested in pension policy and therefore stood aside. In the coalition negotiations, Riester and Dreßler clashed over pension policy, particularly whether the government should respond to demographic change. Riester enjoyed Schröder’s unreserved support, so he was able to win the initial battles. However, the dispute was not resolved. The “modernizers” prevailed only after a sudden change of the power constellation at the very top of the party. The leader of the traditional left in the SPD was the influential Oscar Lafontaine. He had served as minister president of the Saarland and had been the SPD’s unsuccessful chancellor candidate in 1990. In 1998, he became finance minister under Schröder while retaining the chair of the party. Lafontaine refused to subordinate himself to the new chancellor and advocated policies very different from those of Schröder. The result was a power struggle that culminated in Lafontaine’s resignation from the cabinet, his seat in the lower house of the federal parliament (Bundestag) and from the chair of the SPD on March 11, 1999. Within a few months, Dreßler had also withdrawn from his party offices. This proved to be a decisive defeat for the traditionalists in the party and a victory for the “modernizers” around Schröder.

The Reform Process

With greater cohesion in the cabinet, and with the chancellor’s support, Riester embarked upon his reform effort. Prior to Lafontaine’s withdrawal, the government passed the Correction Law suspending the Kohl government’s pension reform law, most importantly the “demographic factor,” until the end of 2000.^{Footnote 53} In effect, the coalition gave itself two years to find a more acceptable response to demographic and world market changes than its predecessor had. In February 1999, Riester attempted to do that by proposing a variation of his wage fund plan. People covered by the GRV would be required to place a small part of their income in capital-based individual savings accounts to supplement their government pensions. He also founded a coalition working group to draft a comprehensive plan for pension reform.^{Footnote 54} In June, the Labor Ministry circulated a summary of basic reform ideas (Eckpunktepapier) for comment. It included a proposal to establish an obligatory capital-based retirement savings plan by 2003.^{Footnote 55} The left wing of the SPD and the Greens opposed compulsory private retirement saving. The conservative tabloid Bild and the left-wing Berlin daily, Die Tageszeitung, also criticized the compulsory aspect of Riester’s proposal. On June 21, 1999, Riester gave an interview to Bild, Germany’s most widely read daily newspaper, in which he defended his scheme for compulsory private retirement saving. Bild responded the next day by publishing glaring headlines highlighting the “Wave of Rage” that was rolling toward the national capital in Bonn due to Riester’s “forced” savings plan. On June 23, the cabinet quickly retreated from the compulsory aspect of the proposal. It adopted a “Program for the Future” that included a voluntary, subsidized private retirement savings component.^{Footnote 56} On the following day, Riester presented the cabinet’s concept to the Bundestag. He stressed that his scheme, while it would reduce the replacement ratio in the GRV, would result in higher total retirement income. He called upon the opposition to join the government in reforming the country’s pension system.^{Footnote 57} Yet fears persisted that the government would enact a compulsory plan. They contributed to the painful losses that the SPD suffered in the five state elections held in the fall of 1999, causing it to lose control of the upper house of the national parliament, the Federal Council (Bundesrat), thereby endangering passage of the reform.^{Footnote 58}

The electoral defeats in the autumn of 1999 gave the government greater incentive to seek a consensus with the opposition. Therefore, on January 15, 2000, negotiations began with the Union parties and the Free Democrats. Riester presented them with a five-point plan to begin the discussion. They responded with a ten-point plan. The talks dragged on through the spring, when more state elections took place and then meandered through the summer with no clear result.^{Footnote 59} The two sides agreed on both the need for reform and that a private savings component should be added to the pension system. However, their political rivalry prevented them from cooperating. The Union parties badly wanted to regain control of the cabinet. They hoped to do that, in part, by demonstrating that they had a stronger social conscience and were more competent on social issues than the Social Democrats. Simultaneously, the leader of the Bavarian CSU, Edmund Stoiber, challenged the new, inexperienced leader of the CDU, Angela Merkel, for leadership of the conservative camp. Stoiber wanted to use pension reform as a campaign issue, while Merkel was prepared to compromise with the SPD.^{Footnote 60} Indeed, Stoiber aimed at becoming the Union’s chancellor candidate in the next national election. Consequently, the two sides moved closer together on substance while remaining bitter rivals politically.

Having produced a draft plan in mid-January 2000, the coalition working group completed a more developed scheme called the Schöneberg Resolutions on May 30. It provided for a voluntary private savings plan that would use up to four percent of the insured’s income. A balancing factor would be added to the initial pension calculation formula that would slow the growth of pensions over time by reducing the replacement ratio. The extent to which the balancing factor reduced the retiree’s pension would depend on how long the person worked and when they retired. As Riester later admitted, this feature was intended to have the same effect as the hated demographic factor.^{Footnote 61} The government would offer financial incentives to attract people to the private savings program. The retiree’s standard of living would be maintained by the combination of government and private benefits.^{Footnote 62} Two weeks later, Riester attempted to gain support for this concept at a meeting of the chairs of the parties represented in the Bundestag. The Union parties had earlier called for ten billion DM in subsidies for voluntary savers. Riester trumped that proposal by offering twenty billion DM.^{Footnote 63}

Despite these sweeteners and his persistent effort to win opposition support for his concept, resistance to the private savings plan remained intense. Indeed, hostility to Riester’s plan was strong within the Labor Ministry itself. To silence the dissenters, with the full support of Schröder, who was quite willing to play hardball, Riester relieved his senior civil servant, Thomas Ebert, a traditional Social Democrat, in May 2000. Next, Riester took the unprecedented step of removing the chair of the Social Advisory Council (Sozialbeirat), Winfried Schmähl. To replace him, he brought in a member of the new professional wing of the SPD, a man who also boasted strong academic credentials, Bert Rürup.^{Footnote 64}

One critic that could not be silenced was the Association of German Pension Insurance Carriers. The VDR enjoyed enormous credibility. It had accumulated a great deal of expertise over the decades and had built a staff composed of actuaries, lawyers, and demographers. It published a respected journal and had influenced earlier reform efforts. Moreover, even though it was closely associated with the German Union Federation, it had maintained its political independence. On June 16, 2000, the VDR issued a position paper in which it criticized the balancing factor. It pointed out that the factor would greatly reduce the replacement ratio provided by GRV pensions and would treat current and future retirees differently. It thought that the differential treatment was probably unconstitutional. The VDR proposed replacing the balancing factor with a component that would be inserted into the annual pension-adjustment formula that would limit the growth of benefits equally for everyone.^{Footnote 65}

At the beginning of July 2000, the ruling coalition formally adopted a policy for pension reform. It included provisions under which the contribution rate would not rise above 20 percent by 2020 and 22 percent by 2030. The net replacement ratio would not fall below 64 percent, while the overall support ratio, that is, including benefits from the voluntary private savings plans, would exceed 70 percent. The SPD parliamentary delegation compelled Riester to add a clause that would require the government to take action if the net replacement ratio fell below 64 percent and another that would require employers to transfer part of employee wages into retirement savings plans at the request of their employees and at no cost to them. The government would subsidize voluntary private retirement saving. The balancing factor included in the initial pension calculation would stabilize the contribution rate by reducing the growth of benefits over the long term.^{Footnote 66}

While the government was refining its position, Schröder and Riester concluded that reaching a compromise with the opposition would be impossible. Therefore, at the end of the summer, they changed their political strategy. They began to canvass support among the leftwing of the SPD and the labor unions. The inclusion of the minimum replacement ratio and free employer savings transfers was part of this strategy. In addition, Riester negotiated with the chief of IG Metall, Klaus Zwickel, over the size of the replacement ratio. The labor minister offered the union leader 65 percent. Zwickel drove a hard bargain, forcing Riester to accept 67 percent. In return, the government would be able to retain the balancing factor. The unions then publicly signaled their support for the reform.^{Footnote 67} With this deal in hand, the government released a preliminary draft of the reform bill called the Old Age Wealth Law (Altersvermögensgesetz – AVmG). It differed from the BMAS concept paper in providing details of the subsidies to private retirement savings and how they would be handled administratively.^{Footnote 68} Criticism was restrained, so the government proceeded to submit a bill to the Bundestag on November 14, 2000. This latest variant of the government’s reform plan differed from its predecessor in how subsidies were scheduled and added a provision for deferred taxation of benefits from the private savings accounts.^{Footnote 69} In the initial debate on the bill in the Bundestag, Riester again asserted that the net effect of the measure would be to increase the pensions of retirees while limiting the growth of the GRV’s contribution rate. The new voluntary private savings plans would supplement the government’s compulsory system, not replace it. He invited the opposition to support his initiative.^{Footnote 70}

Horst Seehofer of the CSU responded for the Union parties by launching a bitter attack on Riester’s plan. He complained that the details of the reform were in constant flux, that the previous government’s demographic factor was superior to the balancing factor in the current proposal, and that no subsidies were being offered for those wishing to save to buy their own homes. He also predicted that the government scheme would not yield the replacement ratio that Riester promised.^{Footnote 71} His CDU colleague, Andreas Storm, who had conceived the previous government’s demographic factor, criticized the cabinet for attempting to rush the bill through the parliament. Storm pointed out that the balancing factor would provide people with an incentive to retire early and called on the government to adopt the VDR’s alternate proposal.^{Footnote 72} Like the CDU and CSU, the Free Democrats, agreed with the government that private retirement saving was necessary. But they rejected the cabinet’s proposal for achieving that goal. They, too, feared that the government was attempting to rush the bill through the legislature and endorsed the VDR’s counterproposal. The FDP also pointed out that the government plan would make retirement saving more expensive for the insured. It would have them make contributions to both the GRV and to private plans, raising their overall contribution rate. The Free Democrats accused the government of flirting with the previous government’s demographic factor, charging that it was trying to accomplish the same thing under another name.^{Footnote 73} They also noted that the government’s concept was based on the assumption that the economy would boom over the next two decades, an unlikely prospect indeed.^{Footnote 74}

In mid-December 2000, the Bundestag’s Committee for Labor and Social Affairs conducted three days of hearings during which a wide range of experts expressed their opinions. They subjected the draft to withering criticism. The dispute was so heated that Riester was forced to return early from an official trip to Australia.^{Footnote 75} Criticism centered on the balancing factor and the resultant reduction of the replacement ratio.^{Footnote 76} A highlight of the proceedings was the testimony of the chief of the VDR, Franz Ruland. He pointed out, again, that the balancing factor would treat people differently depending on when they retired. He also explained how the government’s proposal would change how the replacement ratio would be determined so that future calculations of that measure would not be comparable with past results. The balancing factor contradicted the government’s policy of encouraging people to work longer and violated the constitutional guarantees of property rights and equal treatment. Ruland proposed that the balancing factor be dropped and that a component be added to the annual pension-adjustment formula that would limit the growth of benefits for all retirees in the same way.^{Footnote 77} Under extreme pressure, Riester considered resignation but was encouraged to stay on by Schröder and the influential head of the chancellor’s office, Frank-Walter Steinmeier.^{Footnote 78} Instead, the balancing factor was deleted and the VDR’s proposal was worked into a revised draft.

While the government bill was being debated by the Bundestag, it was also being considered by the Federal Council. Again, the opposition subjected the government plan to severe criticism. Probably the most effective was that of the CDU minister president of Saxony, Kurt Biedenkopf, who coolly dissected the bill and explained its economic and social implications. He, too, noted that the total burden of retirement saving would rise for individuals. He contended that the guaranteed minimum-replacement ratio added at the behest of the trade unions would act as a disincentive to save for those with lower incomes.^{Footnote 79} The Federal Council resolved to ask the government to revise its bill, in particular calling upon it to drop the balancing factor. Significantly, it also objected to the government’s intention to impose part of the cost of the subsidies on the federal states and proposed that saving for home purchases be added to the list of plans that could receive government support.^{Footnote 80} The cabinet accepted most of the upper houses’ recommendations, but it was already moving forward with more significant modifications to the law.^{Footnote 81}

Under the time pressure created by its own Correction Law and mindful of the new balance of power in the Federal Council, the government decided to split the reform bill into two parts. On January 24, 2001, the coalition proposed putting the components of the reform plan that would include the new annual pension-adjustment formula into a separate law. The new bill, called the Old Age Wealth Supplemental Law (Altersvermögensergänzungsgesetz – AVmEG) would not require approval by the Federal Council since it did not affect the finances of the states. The Old Age Wealth Law (AVmG) now featured those provisions that related to the private retirement savings plans and the government subsidies intended to promote them.^{Footnote 82} Since the states would be required to provide part of those subsidies, the Federal Council would have to approve it. That was risky and potentially time consuming since the government did not have a clear majority in the Federal Council. Therefore, the AVmEG would be passed quickly, ensuring that the old demographic factor would not go into effect and that the new benefit growth limitation formula, initially proposed by the VDR, would. The government then would have more time to move the AVmG and the tax incentives through the Federal Council.^{Footnote 83}

The Bundestag debated the two laws on January 26, 2001. Riester and the other coalition speakers touted the new design and appealed to the opposition for support. The opposition accused the government of creating a “bureaucratic monster.”^{Footnote 84} Behind the scenes a new drama occurred when Zwickel of the metal workers union accused the government of attempting to deceive the labor movement by slipping a requirement for a 64 percent minimum-replacement ratio through the legislature rather than the promised 67 percent. He threatened to turn to the sensationalist Bild-Zeitung to embarrass the government.^{Footnote 85} Schröder, Riester, and Steinmeier rushed to mollify the union leader and quickly produced a supplemental bill that would attach the required replacement ratio guarantee to a law concerning the pensions of artists.^{Footnote 86} The Bundestag then passed both laws and sent them to the Federal Council.

On February 16, 2001, the opposition repeated its criticism of the government’s concept in the Federal Council, adding that it had not been deceived by the split of the initiative into two bills.^{Footnote 87} Remarkably, the Social Democratic minister president of Schleswig-Holstein, Heidi Simonis, expressed her displeasure with the financial burden that would be imposed on the states and offered to work with the opposition to solve the problem.^{Footnote 88} The Federal Council voted to accept the supplemental law and rejected the Old Age Wealth Law.^{Footnote 89} The government responded, as expected, by calling for the formation of a mediation committee.^{Footnote 90}

The mediation committee, consisting of representatives of the two chambers of the parliament, debated the Old Age Wealth Law from February 19 February to May 9. Riester offered to make concessions to the Union parties in order to move the bill through. Ultimately, a series of side deals was cut to ensure favorable votes from those states that had coalition governments. A provision was added for home mortgage subsidies to placate the FDP in the Rhineland-Palatinate. More forms of retirement saving were added to the list of those eligible for subsidies. The states of Berlin and Brandenburg were satisfied by the placement in their territories of the new office that would administer the private savings subsidies, creating one thousand jobs.^{Footnote 91} The committee’s recommendation was then forwarded to the two houses. On May 11, the Bundestag approved the mediation committee’s recommendation after just an hour and fifteen minutes of debate. Again, the coalition invited the opposition to support the bill, unsuccessfully.^{Footnote 92} After another stormy debate, and against the votes of the states ruled by the opposition, the AVmG was approved by the Federal Council later the same day.^{Footnote 93}

In its final form, the Old Age Wealth Law established a system of incentives for those covered by the GRV to save up to 4 percent of their incomes annually in private retirement savings plans. The government offered subsidies consisting of cash transfers and tax breaks to encourage people to enroll. Only plans approved by the government would qualify for subsidies. Money could be placed in a wide variety of savings vehicles, including life insurance plans, down payments on homes, and employer savings plans. Supervisory and regulatory mechanisms were built to oversee and steer the new private retirement savings mechanism.^{Footnote 94} The Old Age Wealth Supplemental Law inserted the new annual adjustment formula into the existing pension law, modified the definition of the replacement ratio, and set the goals for limiting the increase of the contribution rate.^{Footnote 95}