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How Germany plans to stabilise pension contributions

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How Germany plans to stabilise pension contributions
Hubertus Heil (right), Federal Minister of Labor and Social Affairs, speaks alongside Christian Lindner (left), Federal Minister of Finance, during a press statement on the new planned Pension Package. Photo: picture alliance/dpa | Michael Kappeler

The German government wants to stabilise pension payments going forward, and slow down the expected increase in pension contributions at the same time. Here's what you need to know.


Labour Minister Hubertus Heil (SPD) and Finance Minister Christian Lindner (FDP) presented a reform package on Tuesday that is intended to guarantee a pension level of 48 percent for the future -- meaning that pensions would equate 48 percent of your average salary over the course of your working time.

Because this costs more money, but pension contributions should not rise too much, additional financing is needed from another source, they said.

READ ALSO: Six things to know about Germany's new pension reforms

What's the proposed pension plan?

The German government is to invest billions in the capital market and pay annual subsidies to the pension insurance from the interest earned starting in the mid-2030s, FDP leader Lindner announced. In addition to the contributions and subsidies from the federal budget, the pension insurance scheme thus receives a third source of funding.

According to the draft law, however, this will not be quite enough to prevent an increase in contributions. The German government expects that the pension contribution will nevertheless rise from the current 18.6 percent to 22.3 percent in the next few years due to the aging population. Without investing in the capital market, however, it would even rise to 22.7 percent in 2045.

The plan is for the federal government to build up a capital stock of 200 billion by the mid-2030s, primarily through loans and transferred assets. From the income on the stock market, 10 billion are then to flow annually into the statutory pension insurance.


"This is not the only solution to the challenge of long-term pension financing," Lindner stressed. But it is a building block that makes a difference.

"For more than a century, the opportunities offered by the capital market in statutory pension insurance have been neglected," he said. "Now we're using it."

Heil and Lindner emphasised that it was not about gambling and short-term speculation. "This is money well spent in the long term," said the Minister of Labour. It is also not a question of investing citizens' contributions in shares, but only money from the state.

Why Germany needs to protect the pension level

All people must be able to rely on the statutory pension, Heil stressed. Without the reform, pension levels would very soon decouple from wage developments. This means that pensioners are becoming poorer than the working population.

"We will prevent this by safeguarding the pension level," Heil stressed. The pension level indicates what percentage of the current average salary someone receives as a pension who has always worked at the average wage and paid contributions for exactly 45 years. When pension levels fall, pensions rise less than wages.


Heil promised: "There will be no reduction in pensions and no further increase in the retirement age." The statutory pension remains at the heart of old-age provision. For many pensioners, this is the main income and must therefore remain stable.

If Heil and Lindner have their way, the reform package should be adopted by the Bundestag before the parliamentary summer recess in July.

READ ALSO: How does Germany's retirement age compare to the rest of Europe's?



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