German pensions to rise above forecasted level this year

Pensions in Germany are to increase more than initially expected, it emerged on Tuesday.

Schlosspart Pillnitz
An elderly couple sit on a park bench in Schlosspark Pillnitz in Dresden. Photo: picture alliance/dpa/dpa-Zentralbild | Sebastian Kahnert

They will go up by 5.35 percent in western states and by 6.12 percent in the former East German states this July, the Ministry for Labour and Social Affairs said.

The news will come as a pleasant surprise to pension-age people in Germany, who had previously been warned to expect a more modest increase of around four percent on July 1st.

The traffic-light coalition had reduced its forecasted pension increases in order to recoup some of the funds used to avoid a cut in pensions in 2021, when the Covid pandemic was still tearing through the economy.

This has been termed the “catch-up” factor. 

Instead, increases of 5.35 percent and 6.12 percent respectively will outstrip the high levels of inflation driving up the cost of living in Germany. 

According to the Ministry of Labour and Social Affairs, the increases still take the catch-up factor into account and will represent a smaller increase than usual. That will allow the government to recoup some the money used to avert a 2021 pension cut over time.

However, Labour Minister Hubertus Heil described the rise as “significant” and a fair increase for those who had worked in the country for several decades. 

READ ALSO: Germany plans reforms to avoid double taxation on pensions: What you need to know

“I am pleased that we can announce a significant pension adjustment today,” he said. “Especially in view of the current challenges – be it rising prices or the international crisis situation – it is important to see that our pension system works.”

The development of pensions should not be decoupled from the development of wages, Heil added. 

Labour Minister Hubertus Heil (SPD)

Labour Minister Hubertus Heil (SPD) speaks in the Bundestag on March 18th. Photo: picture alliance/dpa/dpa-Zentralbild | Britta Pedersen

Pensions linked to wages

The current increase is based on data from the Federal Statistical Office and the German Pension Insurance Association. 

According to the ministry, the development of wages is a crucial factor in determining the increase in pensions. 

This year, the Federal Statistic Office reported average pay rises 5.8 percent in western German states and about 5.3 percent in the former East German states. The actual wage development of people with pension insurance is also taken into account. 

“This has a clearly positive effect this year because periods of short-time work are also included in the contributions,” the Labour Ministry said.

With the short-time work (Kurzarbeit) scheme, wages for employees on reduced hours were topped up by the government to ensure that people did not have to suffer a large cut in wages.

This means that workers essentially earn a higher rate per hour, which also has an impact on pension increases.

But trade unions criticised the fact that the government would be increasing pensions at a lower rate than wages due to the catch-up factor.

Anja Piel, executive member of the German Federation of Trade Unions (DGB), warned: “Further price increases are imminent, especially in energy costs.”

She added that the DGB did not yet know what exactly the federal government had calculated in its complex formulas.

However, the unions would “fend off any attack aimed at further decoupling pensions from wages”, she said. 

An aging population

Germany has been facing challenges for the past few years as an increasing number of people from the baby boomer generation reach pension age.

However, in part due to a rise in skilled immigration and more women entering the workforce, the number of people paying into the pensions pot has also increased.

With a new wave of people expected to retire in the coming decade, the traffic-light coalition plans to tackle the questions of pensions and the country’s aging population by transitioning to a Swedish-style system.

READ ALSO: Pensions in Germany: How the new government plans to solve an age-old issue

This will see insured employees pay around two percent of their income into a private equity pension pot that will be invested in lower risk stocks. 

The other 16.6 percent of contributions will follow the traditional German model and be split between employees and their employers. 

Through this system, the traffic-light coalition has promised not to raise the pension age and to keep the rate stable at 48 percent. 

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Consumers in Germany face further food price hikes

People in Germany will have to prepare for more increases in the cost of several products, especially food and drink, according to researchers. But there are signs that inflation could ease up later in the year.

Consumers in Germany face further food price hikes

According to the survey conducted in June among food, beverage, and tobacco retailers, price expectations are at 98.9 points. This means that almost all bosses surveyed are planning to raise prices, and consumers in Germany will have to dig even deeper into their pockets in the coming months.

The majority of the surveyed retailers in other sectors also plan to put prices up: their price expectations rose to 78.6 points, up from 75.5 points. “We can therefore expect inflation rates to remain high for the time being,” said Timo Wollmershäuser, Head of Forecasts at ifo.

The points indicate the percentage of companies planning to raise their prices. The balance is obtained by subtracting from the percentage of companies that want to raise their prices, the proportion of those that want to lower their prices. If all the companies surveyed planned to increase their prices, the balance would be 100 points.

People in Germany have been dealing with the rising cost of living for months as inflation has spiralled upwards.

Last week the Federal Statistical Office estimated inflation for June at 7.6 percent year-on-year. Although this means that inflation slowed down slightly, it is still at a very high level. Food prices rose at an above-average rate of 12.7 percent.

READ ALSO: German inflation slows in June as government steps in

However, the ifo Institute went on to say that there were signs that the inflation rate could go down. 

“There are initial signs that the rate of inflation could gradually decrease toward the end of the year,” Wollmershäuser said.

“In several economic sectors with production upstream of private consumption, price expectations have now dropped twice in a row.”

These include manufacturing (which was 59.7 points and previously 66.7 points), construction (50.0 points, previously 56.0 points), and wholesale (57.4 points, previously 68.1 points). The ifo said it is only among service providers that price expectations have remained largely the same (47.1 points).

It’s not clear how high the planned cost increases will be because the ifo Institute does not ask about the amounts.