Germany announces biggest pension hike in decades

The German government confirmed on Wednesday that it was hiking the state pension by up to 6 percent, but trade unions warned that the increase would immediately be eaten up by inflation.

Germany announces biggest pension hike in decades
A woman takes money from her purse. Photo: picture alliance/dpa/CLARK

German pensioners are about to receive the highest increase to their payments in years.

Pensioners in west Germany are to receive the largest single hike in their payments since 1983, with the government announcing a 5.35 percent increase that will come into effect on July 1st.

In east Germany, where the pension is calculated differently to compensate for lower wages, pensioners will get an even bigger higher hike of 6.12 percent, the biggest such increase in the former East since 1994.

“The statutory pension is working very well despite the challenges we are facing right now,” Labour Minister Hubertus Heil said on Wednesday.

As a result of the increase, a monthly pension of €1,000 based only on west German contributions will rise by €53 on July 1st, while a pension of the same amount in the east will rise by around €61. 

READ ALSO: Could people in Germany soon be working until the age of 68?

But social welfare associations and unions said that Germany’s 21 million pensioners are unlikely to benefit from the increase due to the current high level of inflation. 

“The comparatively good pension increase this year will be eaten up completely by rising prices,” said Anja Piel from the German Federation of Trade Unions (DGB).

“Pensioners are massively affected by inflation-related cost increases,” agreed Ulrich Schneider, head of the Paritätischer Gesamtverband. He added that the fact that there had been no rise in pensions in 2021 made the increase seem more impressive than it actually is.

Pensions are adjusted every year on July 1st, depending on wage trends. If wages fall, a legal guarantee prevents the retirement benefit from also falling.

Last year there were no pension increases due to the fact that wages flatlined. 

READ ALSO: Pensions in the EU: What you need to know if you’re moving country

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German pensions to rise above forecasted level this year

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

German pensions to rise above forecasted level this year

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.