Encouraging work during the golden years: Does an active pension serve as a driving force?
The German government has introduced a new policy known as the active pension, designed in a relatively administration-light manner. This initiative aims to encourage older individuals, including pensioners and the self-employed, to remain in the workforce beyond the regular retirement age.
However, concerns have been raised about the potential for free-riding effects with the active pension. Around 600,000 people were still working beyond the regular retirement age at the end of 2023, with the majority earning less than 24,000 euros per year. The higher earners, particularly the self-employed, have been a point of contention, with more than half achieving a higher income and receiving an average of around 68,000 euros per year.
Critics, such as Andreas Lutz, argue that the active pension model proposed by Chancellor Merz fails to consider the social realities and legal equality guaranteed by the constitution, particularly the principle of equal treatment. Lutz is concerned that the model might exacerbate social inequality and does not adequately respect constitutional guarantees of non-discrimination.
The active pension is considered a "second-best solution" because early retirement incentives were not abolished. Additionally, the innovation may lead to tax losses. Around 230,000 dependent employees in retirement could benefit directly from the active pension, with annual tax losses of around 800 million euros.
The Institute of the German Economy (IW) has calculated that the treasury would lose around 2.8 billion euros annually if the self-employed were included, reducing revenue effects to 1.4 billion euros without this group.
The trade union federation (DGB) believes that general tax benefits for a few do not solve the general problems with employment after retirement. They suggest that an additional 75,000 pensioners would need to enter the labor market to balance out the losses with additional tax and contribution revenues.
Despite the criticisms, the active pension could potentially increase employment among the elderly. Anyone who is 67 years old will receive the active pension without further proof. The law is to be evaluated after three years.
It remains to be seen how the active pension will impact the German economy and society. While it aims to encourage older individuals to remain in the workforce, concerns about social inequality, tax losses, and its effectiveness in addressing employment issues after retirement persist.
