Uwe Schröder (renamed) was poisoned by his contract with Riester. For years, a government official paid into his fund agreement at DWS, then got out. “My later pension would be 60 euros,” says Schröder, “for all the effort I had with Riester, that was not enough for me.”
Contributions were not important for people with high incomes, but above all tax benefits, which the state also supports with private old-age insurance. During the term of the contract with Schröder, a good € 2,000 was received for tax refunds, around € 1,300 through allowances. The investor saved almost 15,000 euros before leaving. After graduation, he had to pay the state the money he gave. He accepted it. “The uproar over tax returns every year has been too unpleasant for me,” he recalls.
Riester’s savings do not have a good reputation
Too bureaucratic, too complicated, too expensive: Riester’s savings do not have a good reputation. It was different in the beginning. In 2002, the then Federal Minister of Labor, Walter Riester (SPD), introduced state-subsidized old-age insurance to compensate for cuts in statutory pensions. The first years went well and more and more people signed contracts with Riester. But the euphoria evaporated, many providers withdrew from the business. New stores have been declining since 2018. In addition, a fifth of the almost 16.5 million contracts are inactive, which means that more than 3.3 million savers have closed payments.
The state helps: Contributions and tax savings are intended to encourage people to eat privately. Photo: obs
800,000 people have to pay contributions every year
What will cause the barrel to overflow by hundreds of thousands is their dispute with the contributory agency. Full contributions are only available if people pay at least four percent of their retirement income (including contributions) to the contract – up to a maximum of € 2,100 per year. For example, anyone who does not pay their payments after a salary increase, or who continues to receive child benefit when the child has reached the legal age limit, must expect compensation.
“This causes frustration and unnecessary costs,” says the GDV insurance association. “The contribution agency should first check and then pay,” suggests Peter Schwark, GDV board member. “Today, the opposite is true, which means that 800,000 savers have to pay their allowances every year,” said Schwark Tagesspiegel. And there are also common cases, such as the case of Uwe Schröder: People who fail because of the complicated interplay of contributions and tax benefits.
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Protection with gaps: The Riester grant is no longer up to date. Photo: Jörgen Fölchle – stock.adobe.com
One thing is clear: something has to happen
Consumer advocates and the financial sector agree on one thing: There can be no “normal practice” with state-subsidized private old age. However, the question is: can the Riester system be saved through reforms, or a whole new path should be taken in state-sponsored private pensions, as demanded by consumer advocates. The Federal Association of Consumer Organizations (VZBV) is pushing for a change in the system. In future, the state-supported provision is to be implemented through a fund managed by a public institution such as the Bundesbank or a new body created. VZBV financial expert Dorothea Mohn emphasizes that the money would continue to belong to the citizens and not to the state. If the fund raises capital and puts it on the capital market in a package, a public institution can “impose very favorable conditions”, says the consumer lawyer.
Complex mission: Jörg Kukies, Secretary of State for the Federal Ministry of Finance, wants to reform this … Photo: Thilo Rückeis
Politicians are under pressure to act. In the coalition agreement, the Union and the SPD stipulated that a new low-cost standard product for state-supported old-age services should be introduced during this legislative period. “We are working intensively on the concrete implementation of the Riester reform and are firmly committed to reaching an agreement in this legislative term,” Jörg Kukies, Secretary of State for the Federal Ministry of Finance, announced recently at the Handelsblatt meeting.
It will not be easy: After a process of dialogue with providers’ associations, consumer advocates and the social partners, it was clear that there were “very different perspectives and proposals, from optimizing or further developing existing funding to completely different approaches to funding,” said a ministry spokeswoman Daily Mirror. “The formation of opinions on this topic is not yet complete.” In addition, the Ministry of Finance coordinates with the Ministry of Labor in the government.
“Riester is not dead,” insurance companies say
Providers want to stick with the Riester. It is said that there is nothing better for families and people on low incomes. “Riester is not dead,” Schwark points out. However, the funding system is too complicated and too inflexible. “Small steps are not enough,” he says, “the Riester’s pension now needs a big bang that gives a new impetus.”
It’s worth it: families with many children benefit from funding. Photo: imago / photothek
Insurers, investment companies and building societies affected by their “Wohn-Riester” published a five-point plan in November last year to save Riester: In the future, there should be cheap standard products in all variants of the Riester “The self-employed should also be able to “riot”, mitigate the contribution guarantee and automate the contribution process. Next point: Allowance subsidies and tax refunds should be more transparent. “The state should increase 50 percent of its own contribution in the future, which will later be offset against the tax return,” Schwark told Tagesspiegel. And the rigid, twenty-year-old funding ceiling of € 2,100 a year needs to be more dynamic. Instead of fixed limits, savers should in future be able to pay four percent of their gross income from government subsidies up to a contribution assessment ceiling. People with higher salaries would benefit from this.
Higher return: Consumer advocates want to organize private subsidies provided by the state subsidized through the fund. Photo: picture-alliance / dpa-tmn
CDU financial expert Brodesser: “Riester is the most successful private pension product”
Government factions are divided as they are divided between consumer advocates and financial companies. Riester is “by far the most successful private pension product,” emphasizes CDU financial expert Carsten Brodesser. “Instead of thinking about changing the system, the Riester grant needs to be reformed,” he told Tagesspiegel.
Union policy also supports better control of contributions, simplification of funding, increase of the funding ceiling and the inclusion of the self-employed. Brodesser will leave it to insurance companies, fund companies and building societies to decide whether the company will continue to offer a premium guarantee for capital paid up by customers.
The SPD sees Riester as an obsolete model
However, the SPD sees the systemic issue in a completely different way: Riester’s savers would, of course, have to be able to continue their contracts, said Lothar Binding Tagesspiegel. “But when it comes to private pension reform, Riester is the wrong approach: we should leave everything as it is in the Riester,” a spokesman for the SPD parliamentary group said. As a model for the future, Binding thinks it’s a lot of ideas for a consumer advocacy fund, but he could imagine the insurance industry being involved. A financial expert sees the best pension provision elsewhere: in owner-occupied property. The state should support the acquisition.
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One thing is clear: this winter, it will be decided whether and how it will continue with Riester. “We’re at a crossroads on the road now,” says Brodesser. However, time is playing into the hands of Riester critics. If the topic is postponed to the next legislative period, this increases the chances of changing the system.