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Why 2023 is a critical year for Germany’s retirement system

The Local (news@thelocal.com)
The Local ([email protected]) • 2 Jan, 2023 Updated Mon 2 Jan 2023 11:54 CEST
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Germany's social insurance system for retirees is coming under increasing demographic pressure. Photo by Sven Mieke on Unsplash

This year will be the first when more people are retiring than coming of age in Germany. Here’s what that means for retiring in Germany - and how the government hopes to address the problem.

What’s happening?

Germany’s population is ageing – fast. This year, there will be more older people requiring some sort of care than people under the age of 30. Overall, the country’s ageing population means there are fewer and fewer people working in Germany relative to the number of retirees taking money out of state pension funds.

That means it’s going to get harder for Germany to maintain its social insurance system in old age. There simply are fewer workers around to pay for what the pension system needs.

According to the Federal Institute for Population Research in Cologne, in 2020 there were just 1.8 people working in Germany for every pensioner. By 2030, that’ll reduce to 1.5 workers for every pensioner. To put that in perspective, there were six workers a pensioner in the early 1960s and 2.7 in 1992 – only a few years after the economic shock for German reunification.

How can the problem be fixed?

There’s a few ways of addressing the demographic pressure Germany’s retirement system is coming under.

The first is to increase the country’s population and its base of workers. German policies like child’s allowance – or Kindergeld – are designed to encourage people in Germany to have more children. However, it obviously takes time for policies like that to help address a worker shortage. Children born today will only hit the next workforce in two decades, whereas Germany is experiencing a current shortage of skilled labour.

READ ALSO: What benefits are you entitled to if you have children in Germany?

That’s part of why the current government estimates Germany needs about 400,000 skilled workers from abroad to come into the country and address current gaps in the labour market. The social insurance contributions they then pay help to relieve the pressure on the German pension system.

Without getting more workers – either through people coming of age or through immigration into Germany – the government could be left with little choice but to either increase the amount of pension contributions workers have to pay, or cut benefit payments.

Neither option is particularly attractive in a cost of living crisis. And each one risks alienating an influential group of voters – either the workers who pay pension insurance, or the pensioners who rely on pensions.

Germany is currently in the process of raising the retirement age to 67 from 65, but only for those born after 1967, partly to reflect the now higher life expectancy in the country. In the early 1970s, life expectancy in Germany was about 67 years for men and 74 for women. Now it’s about 79 for men and 83 for women. That means people in Germany are also getting pension payments for longer than they used to.

READ ALSO: EXPLAINED: How Germany plans to make immigration easier for skilled workers

What is the government doing to reform the pension system?

The short answer is – not much. Any suggestion of seriously reforming Germany’s pension system is likely to be met with fierce backlash.

Last year, the Federal of German Employers’ Associations in the Metal and Electrical Engineering Industries suggested raising the retirement age to 70 to help compensate for this – something Labour Minister Hubertus Heil rejected.

At the same time, a government expert commission warned the pension system could eat up to 44 percent of the state budget by 2040 if no reforms were made. But very little action has so far been taken.

This year, the federal traffic light coalition will start a state-subsidised pension fund invested in shares, rather than the government bonds that dominate the balance sheets of most German pension funds. It’s intended to relieve the state’s current “pay-as-you-go” system.

But experts say the €10 billion investment simply isn’t enough and will take effect too late to solve current problems.

“It won’t take €10 billion, but €3,000 billion,” Pensions expert Bernd Raffelhüschen told Focus magazine. “Capital cover through shares is a good idea, but it only takes effect 20 to 25 years later.”

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

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