From Bismarck’s Pension Trap to the New Silver Workers of Tomorrow: Reflections on the German Pension Problem

1. Introduction

The modern world, for all the great advances in most parts of our lives, has created a surprising conundrum: Bismarck’s pension trap. A system to provide old-age security based on an inadequate if not increasingly meaningless measure, the chronological age of the person. Which, to make matters worse, has been kept constant for more than 100 years.
Surprising is that we apparently feel quite comfortable in this trap, as long as we do not have to bear the full cost of our folly to design a system that encourages people to behave exactly in the way that will undermine its most basic operating principles: retire early to deprive the economic system of productive human capital; have fewer or no children to guarantee the next generation of contributors etc.. It is not only that we seem to have great difficulties getting out of this self-inflicted predicament but worse, we have set in motion a development that has great momentum and cannot easily be stopped unless we rethink in a more fundamental way the manner in which we treat our life-cycle. I shall discuss this issue in more detail in this paper, but before entering the analysis, here are a series of questions that may stimulate our thinking:
1. Why did Bismarck set the retirement age at 65 years and nobody bothered to increase it for a century?
2. Why have we considered all increases in life expectancy over the past 100 years as an extension of the inactive period at the end of our life cycle?
3. Why do we have a public three-generations pension model on the supply side but only a two-generations model on the demand side?
4. Why do we seem to believe that retirement is like living Sundays seven days a week?
5. Why has our modern society failed to integrate the elderly by offering adequate labour market conditions for their participation?
6. And where did all the children go in our advanced economies?

2. Revisiting the Bismarck’s Pension Trap

The first question asked above is key for this paper: Why did Bismarck set the retirement age at 65 years and nobody bothered to increase it for a century? The American Social Security Administration has a partial answer to this question and they report a myth associated with the introduction of the retirement age in Germany by Bismarck1:
“One persistent myth about the German program is that it adopted age 65 as the standard retirement age because that was Bismarck’s age. This myth is important because Germany was one of the models America looked to in designing its own Social Security plan; and the myth is that America adopted age 65 as the age for retirement benefits because this was the age adopted by Germany when they created their program. In fact, Germany initially set age 70 as the retirement age (and Bismarck himself was 74 at the time) and it was not until 27 years later (in 1916) that the age was lowered to 65. By that time, Bismarck had been dead for 18 years.”
In 1889, Germany became the first nation in the world to adopt an old-age social insurance programme. It was designed by Germany’s Chancellor at the time, Otto von Bismarck. The idea was first put forward, at Bismarck’s behest, in 1881 by Germany’s Emperor, William the First, in a ground-breaking letter to the German Parliament. William wrote: “… those who are disabled from work by age and invalidity have a well-grounded claim to care from the state”2. It is interesting to note that William the First addressed two distinct phenomena, age and invalidity, in the same sentence, both with a reference to disability as the triggering circumstance. When consulting the literature of the outgoing 19th century, one realises that at that time indeed, an age of 65 (70) years resulted more often than not in a state of disability, at least if we compare the physical fitness of the person in question to carry out their assigned tasks. It was therefore practical to define an age at which people could generally be considered unfit to continue their labour efforts.
William’s and Bismarck’s aim of the reform was to introduce social insurance in Germany both in order to promote the well-being of workers in order to keep the German economy operating at maximum efficiency, and to stave-off calls for more radical socialist alternatives3. The German system provided contributory retirement benefits and disability benefits too. Participation in the schemes was mandatory and contributions were taken from employer, employee and — through different elaborate mechanisms — from government. Coupled with the workers’ compensation programme established in 1884 and the health insurance laws enacted the year before, this gave Germans a comprehensive system of income security based on social insurance principles4. Since then the German system of social security served as a reference point for reforms the world over and it stood and still stands the test of time reasonably well, considering that it was originally introduced more than a century ago and as remained in place with few changes ever since.
Over time, however, two key points got lost: firstly, Bismarck’s idea to protect against disability caused by age and not against age itself. And secondly, the aim of the reform to promote the well-being of workers in order to allow the economy to operate at maximum efficiency. In today’s world, with life expectancies that are far superior to those registered in Germany at the end of the 19th century5, the same system will have completely different impacts on the economy. The actuarial tables for Germans 1871-80 register the average male life expectancy at birth as 35.6 years and the female at 38.4 years. Today they stand at (tables 2002-4) 75.9 and 81.5 years respectively. Even if one were to take the relatively high infant mortality of 100 years ago into consideration and compare the life expectancy of a person in their working age living then to today, the increase is extraordinary. A German in his or her mid-forties had at the end of the 19th century roughly the same remaining life expectancy as a person going into retirement today6.
So what to make of Bismarck’s first idea to protect against disability from age rather than age itself? If the German retirement system had added as many years to the retirement age as we added to the overall life expectancy over the past century, the official retirement age would stand at around 95 years rather than 65 years. And even if we had only tried to keep the average duration of pension payments constant over the past four decades, the retirement age for German women would today be 75 years and that for men 70 years7. Considering that almost all medical indicators for pensioners — life expectancy, disability rates, morbidity etc. — are much more positive than they were 100 years ago, it is difficult to understand why the system has not been adapted sooner to the realities of 20th century, not to say 21st century, life. Prof. Rürup, the chairman of the German Commission for the Sustainability of the Financing of Social Security Systems proposed in the commission report the gradual increase of the official retirement age in Germany to 67 years — starting in 2011 with one additional month per year8. The full increase would thus only be implemented 24 years later, i.e. in the year 2035. Is that enough? The commission itself admits that by then it is expected that the remaining life expectancy of a German man of 60 years of age will have increased again by more than three years. So, while the proposed system to increase retirement ages in the future is neither compensating for the past development nor even catching up with the expected developments of the coming three decades, it is at least — and at last — a step in the right direction.
What is still missing is a more objective criterion as to what sort of protection people really need from government. In Bismarck’s view, disability came first, which means that as long as a person is fit enough to work he or she can in principle arrange for their own protection, regardless of age. This is not to say that they will have to work until they die. It only means that they do not need additional government protection specifically and exclusively because of their old-age. If one considers the amount of products available and sold to protect against financial security and particularly those for old-age, it seems obvious that we need a more fundamental debate of this issue.
The Rürup commission describes in the final report that Social Security Systems’ “raison d’être is to provide individually plannable insurance cover for existential risks which citizens are not capable of assuming on their own”9. It is arguable whether the mere fact that a person reaches a certain age constitutes ceteris paribus a condition that renders him or her incapable to cover risks that he or she could cover before. The longevity risk is a risk that is particularly difficult to cover when it is analyzed in conjunction with factors like the loss of physical and mental abilities that usually — but not always and not for everybody in the same way — accompany the biological ageing process. Age in itself is meaningless — capacity is.
We thus shift our attention from the above described dimension of the pension problem to the issue of the labour markets that have to sustain an ageing workforce and especially a group of elderly workers that are rapidly increasing in number.

Patrick M. Liedtke: Secretary General and Managing Director of The Geneva Association. The Geneva Association is the world’s leading insurance research centre supported by the private insurance industry and has been at the forefront stimulating pension reforms philosophy for over 30 years. Visit for more information.
1 Cf. the historical database of the SSA in the USA, available on
2 Same source.
3 It is ironic that despite his impeccable right-wing credentials, Bismarck would be called a socialist for introducing these programs, as would happen later to other reformers like President Roosevelt in the US. In his own speech to the Reichstag during the 1881 debates, Bismarck would reply: “Call it socialism or whatever you like. It is the same to me”.
4 Unemployment insurance would be added in 1927, making the social system complete by modern standards.
5 For complete series of statistics visit the Statistisches Bundesamt Deutschland.
6 For a more detailed analysis of this phenomenon and related explanations see Liedtke P. (2001): “Driving the Pension Solutions”, Journal for Insurance Research & Practice, journal of the Chartered Insurance Institute Society of Fellows, Vol. 16, No. 2, July.
7 The average duration of pension payments in Germany in 1960 was 10.6 years for women and 9.6 years for men. In 2002 the duration increased to 19.5 years for women and to 14.3 years for men. Source VDR (2005).
8 Achieving Financial Sustainability for the Systems of Social Security, Report of the Commission.
9 Quoted from the commission’s introduction to the English summary of their report.

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