Pensions in Germany: How the new government plans to solve an age-old issue
Germany's ageing population continues to cause uncertainty about the future of the pension system. Here's how the new government is planning to make ends meet.
The issues with Germany's pensions pot are well documented. Thanks to the country's ageing population, over the next 10-15 years, a huge number of people will go from being tax payers to pension recipients, creating a troubling imbalance between people paying into the system and people drawing money out.
It's a problem that has been plaguing German politicians for years - and one that undoubtedly played a key role in coalition negotiations between the pro-business FDP and centre-left Green and SPD parties in November last year.
Now the so-called traffic light coalition is in government, these previously uneasy bedfellows are certain they have found the secret to solving the pensions issue. Like much of the trio's coalition plans, it's a multi-pronged solution that melds ideas from the left and the right.
Speaking to DPA on Thursday, Labour Minister Hubertus Heil (SPD) seemed confident that he could deliver the coalition's promise of a stable pension rate without escalating costs to either employees or the state. "The decisive battle to stabilise pensions is taking place in the labour market," he told reporters.
From 2025, when large swathes of the babyboomer generation will enter retirement, the imbalance won't be solved with hiked-up contributions and state subsidies, the SPD politician warned.
"What is needed above all is to have as many people of working age in well-paid work as possible," he explained.
A demographic problem
In a key manifesto pledge ahead of the federal elections last September, the SPD vowed to maintain state pensions at 48 percent of average salaries, with contributions capped at 20 percent of gross pay.
The party has also promised no further increases in the pensions age during this legislative period. Under the CDU/CSU-led Grand Coalition, legislation was passed to gradually increase the pension age to 67 by 2029.
Nevertheless, critics claim the SPD's pledges are out of step with the reality of Germany's demographics. There are currently around 21 million pensioners in Germany, making up a quarter of the population - and according to the Federal Office of Statistics, the largest cohort of workers is currently aged 55-60. By 2035, most of these working adults will be 70 or over.
The upshot is that the economic balance is set to shift in the coming decades. While currently working-age people outnumber pensioners by a ratio of three to one, this is expected to narrow to three to two by 2060. Soon more people than ever will be withdrawing from the pension pot, and it's unclear whether the contributions of working-age people will be able to keep up.
READ ALSO: Germany plans reforms to avoid double taxation on pensions: What you need to know
The president of the German Employers' Association (AGV), Rainer Dulger, has accused the incoming coalition of shirking much-needed reforms to the pension system. "Politicians are flying completely blind," he told DPA.
According to the AGV's calculations, ruling out a rise in the pension age and keeping the rate stable at 48 percent of gross pay can't be done without increased contributions or heavy government subsidies. Even at today's ratio of workers to pensioners, around €100 billion of public money is funnelled into topping up the pension pot each year.
A two-pronged strategy
For Labour Minister Heil, the key to squaring this circle lies in the traffic light's coalition's double-pronged strategy.
As well as promoting well-remunerated jobs on the labour market to ensure that people make larger contributions, the government will also incorporate an equity pension fund, which they hope will push up reserves.
Labour Minister Hubertus Heil (SPD) speaks in an interview with DPA on January 6th. Photo: picture alliance/dpa/dpa-Zentralbild | Britta Pedersen
READ ALSO: Wages, rent and pensions: What will the new German government mean for your wallet?
At the moment contributions are 18.6 percent of German employees' gross salary, with the employer and employee each paying half of the contribution. The aggregate contribution rate will increase to 20 percent by 2025.
Under the new government's plans, insured employees will soon pay around two percent of their gross wages into a new equity pension pot and about 16.6 percent into a pay-as-you-go system, divided into employee and employer contributions. This was a key win for the FDP, who had pushed for a Swedish-style system where pension funds are invested in lower risk stocks.
Heil said an initial sum of €10 billion would be invested on the capital markets.
"We are stabilising the old-age provision financially by building up the capital stock," he explained. "And we will do our homework on the labour market at the same time."
Growing number of workers
In terms of the labour market, there's also a decent amount of good news to counteract the doom and gloom.
One key positive is that, in recent years, the labour force has actually been growing - and Heil expects this trend to continue.
According to the pensions office, the share of employees between 60 and 64 who are paying into the pension funds rose from 10 to 42 percent from 2000 to 2019. Over the same period, the average of number of years that people pay into the pension pot rose from an average of 27.7 to 36.3 years, in part due to an increasing number of women in the workforce.
School pupils watch police officers training a police dog in Gotha, Thuringia. Photo: picture alliance/dpa/dpa-Zentralbild | Martin Schutt
Another major factor in this development is the number of skilled immigrants who are now paying into the German pension scheme. Within two decades, the number of foreigners in the German pension insurance scheme rose sharply from 2.8 million to 6.8 million. "These developments have led to rising revenues in the pension insurance scheme," a spokesperson for the pensions office told DPA.
The traffic light parties have included a number of pro-immigration policies in their coalition agreement, including plans to make it much easier for people to settle in Germany, get their qualifications recognised and become German nationals.
With this welcoming approach, the government appears to be hoping to encourage much more migrants of working age to come to the country and help prop up the social system as the ageing boomers enter retirement.
READ ALSO:
- What Germany’s coalition plans mean for immigration and citizenship
- IN NUMBERS: Five things to know about Germany’s foreign population
The 'catch-up' factor
With the next pension increase scheduled for July 1st, Heil is keen to get the so-called "catch-up" factor underway after the slump of the pandemic.
The catch-up factor refers to the government's attempts to recoup the funds used to avoid a cut in pensions in 2021, when the Covid pandemic was inflicting its damage on the nation's economy.
As the economy bounces back and wages increase, the Ministry for Labour and Social Affairs plans to raise pensions by a smaller amount than previously predicted in order to pay for the averted pension cut.
Nevertheless, according to estimates, there will still be "a strong pension increase" this year, Heil said. "This summer, as things stand, that should be an increase of over four percent." This is slightly under the 4.4 percent that the Labour Ministry had mentioned in November.
After summer, Heil said that pension development would continue to follow wage development but vowed to avoid pension cuts regardless of the state of the wider economy.
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The issues with Germany's pensions pot are well documented. Thanks to the country's ageing population, over the next 10-15 years, a huge number of people will go from being tax payers to pension recipients, creating a troubling imbalance between people paying into the system and people drawing money out.
It's a problem that has been plaguing German politicians for years - and one that undoubtedly played a key role in coalition negotiations between the pro-business FDP and centre-left Green and SPD parties in November last year.
Now the so-called traffic light coalition is in government, these previously uneasy bedfellows are certain they have found the secret to solving the pensions issue. Like much of the trio's coalition plans, it's a multi-pronged solution that melds ideas from the left and the right.
Speaking to DPA on Thursday, Labour Minister Hubertus Heil (SPD) seemed confident that he could deliver the coalition's promise of a stable pension rate without escalating costs to either employees or the state. "The decisive battle to stabilise pensions is taking place in the labour market," he told reporters.
From 2025, when large swathes of the babyboomer generation will enter retirement, the imbalance won't be solved with hiked-up contributions and state subsidies, the SPD politician warned.
"What is needed above all is to have as many people of working age in well-paid work as possible," he explained.
A demographic problem
In a key manifesto pledge ahead of the federal elections last September, the SPD vowed to maintain state pensions at 48 percent of average salaries, with contributions capped at 20 percent of gross pay.
The party has also promised no further increases in the pensions age during this legislative period. Under the CDU/CSU-led Grand Coalition, legislation was passed to gradually increase the pension age to 67 by 2029.
Nevertheless, critics claim the SPD's pledges are out of step with the reality of Germany's demographics. There are currently around 21 million pensioners in Germany, making up a quarter of the population - and according to the Federal Office of Statistics, the largest cohort of workers is currently aged 55-60. By 2035, most of these working adults will be 70 or over.
The upshot is that the economic balance is set to shift in the coming decades. While currently working-age people outnumber pensioners by a ratio of three to one, this is expected to narrow to three to two by 2060. Soon more people than ever will be withdrawing from the pension pot, and it's unclear whether the contributions of working-age people will be able to keep up.
READ ALSO: Germany plans reforms to avoid double taxation on pensions: What you need to know
The president of the German Employers' Association (AGV), Rainer Dulger, has accused the incoming coalition of shirking much-needed reforms to the pension system. "Politicians are flying completely blind," he told DPA.
According to the AGV's calculations, ruling out a rise in the pension age and keeping the rate stable at 48 percent of gross pay can't be done without increased contributions or heavy government subsidies. Even at today's ratio of workers to pensioners, around €100 billion of public money is funnelled into topping up the pension pot each year.
A two-pronged strategy
For Labour Minister Heil, the key to squaring this circle lies in the traffic light's coalition's double-pronged strategy.
As well as promoting well-remunerated jobs on the labour market to ensure that people make larger contributions, the government will also incorporate an equity pension fund, which they hope will push up reserves.
READ ALSO: Wages, rent and pensions: What will the new German government mean for your wallet?
At the moment contributions are 18.6 percent of German employees' gross salary, with the employer and employee each paying half of the contribution. The aggregate contribution rate will increase to 20 percent by 2025.
Under the new government's plans, insured employees will soon pay around two percent of their gross wages into a new equity pension pot and about 16.6 percent into a pay-as-you-go system, divided into employee and employer contributions. This was a key win for the FDP, who had pushed for a Swedish-style system where pension funds are invested in lower risk stocks.
Heil said an initial sum of €10 billion would be invested on the capital markets.
"We are stabilising the old-age provision financially by building up the capital stock," he explained. "And we will do our homework on the labour market at the same time."
Growing number of workers
In terms of the labour market, there's also a decent amount of good news to counteract the doom and gloom.
One key positive is that, in recent years, the labour force has actually been growing - and Heil expects this trend to continue.
According to the pensions office, the share of employees between 60 and 64 who are paying into the pension funds rose from 10 to 42 percent from 2000 to 2019. Over the same period, the average of number of years that people pay into the pension pot rose from an average of 27.7 to 36.3 years, in part due to an increasing number of women in the workforce.
Another major factor in this development is the number of skilled immigrants who are now paying into the German pension scheme. Within two decades, the number of foreigners in the German pension insurance scheme rose sharply from 2.8 million to 6.8 million. "These developments have led to rising revenues in the pension insurance scheme," a spokesperson for the pensions office told DPA.
The traffic light parties have included a number of pro-immigration policies in their coalition agreement, including plans to make it much easier for people to settle in Germany, get their qualifications recognised and become German nationals.
With this welcoming approach, the government appears to be hoping to encourage much more migrants of working age to come to the country and help prop up the social system as the ageing boomers enter retirement.
READ ALSO:
- What Germany’s coalition plans mean for immigration and citizenship
- IN NUMBERS: Five things to know about Germany’s foreign population
The 'catch-up' factor
With the next pension increase scheduled for July 1st, Heil is keen to get the so-called "catch-up" factor underway after the slump of the pandemic.
The catch-up factor refers to the government's attempts to recoup the funds used to avoid a cut in pensions in 2021, when the Covid pandemic was inflicting its damage on the nation's economy.
As the economy bounces back and wages increase, the Ministry for Labour and Social Affairs plans to raise pensions by a smaller amount than previously predicted in order to pay for the averted pension cut.
Nevertheless, according to estimates, there will still be "a strong pension increase" this year, Heil said. "This summer, as things stand, that should be an increase of over four percent." This is slightly under the 4.4 percent that the Labour Ministry had mentioned in November.
After summer, Heil said that pension development would continue to follow wage development but vowed to avoid pension cuts regardless of the state of the wider economy.
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