Under reforms pushed by the centre-left Social Democrats (SPD), the retirement age will be lowered for those who have paid into the social welfare system for 45 years.
There had been disputes between the SPD and Chancellor Angela Merkel's conservative-bloc over whether years spent unemployed would contribute to the 45 years.
But under Monday's agreement all years spent on short-term unemployment benefit Arbeitslosengeld I will count apart from two years before the pension date, but years spent on long-term unemployment benefit, called Hartz IV, will not.
A so-called “Flexi-Pension” will also be introduced meaning whoever wants to work longer than 63 can.
A vote on the bill will be held on Friday in parliament and is expected to pass easily – the coalition has 504 of the 631 seats.
The compromise reached by the leaders of the Christian Democrats (CDU), Christian Social Union (CSU) and SPD will cost an extra €9 billion to €11 billion a year.
Raising the retirement age has sat uncomfortably with many members of the centre-right CDU and CSU, but Merkel agreed to the SPD demand when she formed a coalition with them in December following September’s elections which left her just short of a majority.
Around 10 million parents whose children were born before 1992 will also receive higher benefits.
Volker Kauder, parliamentary leader of the CDU, said that a planned retirement age of 67 by 2029 would still go ahead for everyone else.
He added that he was happy an agreement had been reached so quickly and said it was a “good example” of how the grand coalition was governing well.
The reforms have faced heavy criticism from business leaders and raised eyebrows from other European countries where Germany has demanded tough economic reform.
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