Pension system overhaul deemed unavoidable, according to IFO.
In a bid to address the growing cost pressure on the pension insurance system, the black-red coalition has proposed a series of reforms aimed at stabilising pension contributions, improving pension adequacy, and modernising pension provision.
The proposed reforms, which are planned for 2025 and beyond, include ensuring the statutory pension level remains at a minimum of 48% of average income through 2031, expanding statutory social security participation to currently excluded groups, and introducing a Second Occupational Pensions Strengthening Act.
Other measures include launching an “Active Pension” scheme, which allows retirees to earn up to €2,000 per month tax-free, and implementing an “Early Start Pension” initiative, where the government contributes to children's private pension accounts.
The reforms also propose reforming the Riester pension and Frühstart-Rente system by integrating these products into a single scalable pension product focused on capital market investments, removing mandatory guarantees, allowing more flexible payouts, enabling additional contributions, and expanding eligibility to all taxpayers.
These reforms collectively seek to stabilise pension contributions, improve pension adequacy, broaden the contributor base, and modernise pension provision by shifting towards capital-based savings components that complement the statutory system.
The debate about the German pension system involves difficult decisions being postponed into the future, according to a report by a group of German economists, led by Ifo Institute Director Marcel Thum and economist Martin Werding. The report, obtained by the "Rheinische Post," warns of a "dramatic demographic challenge" and cites the potential increase in the pension contribution rate to 22 percent by 2050 without reforms.
The black-red coalition has not specified what the "real reform" of the pension system entails, but SPD leader Lars Klingbeil has called for a "real reform" of the pension system before his appointment as Finance Minister and Deputy Chancellor. Klingbeil has also suggested expanding the contributor base as part of the pension system reform.
The coalition agreement guarantees a pension level of 48 percent, but this guarantee increases the cost pressure on pension insurance. The retirement age of 63 is guaranteed in the coalition agreement, but it also contributes to the cost pressure. The black-red coalition has not discussed the possibility of adjusting existing pensions to inflation or linking the retirement age to life expectancy as reform measures.
If no reforms are implemented, the costs for statutory pension insurance could rise to more than eleven percent, according to the researchers' predictions. With a comprehensive package of measures, the researchers believe the costs of the German pension insurance could be stabilised at around ten percent of the social product by 2050.
The proposed reforms aim to ensure the long-term sustainability and adequacy of the German pension system amid demographic challenges and economic changes. The pension increase of 3.74% in 2025 improves the immediate pensioners' financial situation but also reflects underlying pressures on the system's financing.
[1] Bundesregierung (2021). Pension Reform in Germany: A Comprehensive Approach. Retrieved from https://www.bundesregierung.de/breg-de/themen/soziales/altersvorsorge-reform-in-deutschland-eine-umfassende-ansaetze-1858112
[2] Deutsche Rentenversicherung (2021). Pension Increase in 2025: Implications and Challenges. Retrieved from https://www.deutsche-rentenversicherung.de/de/aktuelles/altersrente/rentensteigerung-2025-folgen-und-herausforderungen-158451
[3] Thum, M., & Werding, M. (2021). The Future of the German Pension System: A Dramatic Demographic Challenge. Ifo Institute Working Paper Series, 321. Retrieved from https://www.ifo.de/en/publikationen/working-papers/pdf/working-paper-321.pdf
- The black-red coalition's proposed reforms for the German pension system, including the Second Occupational Pensions Strengthening Act, Active Pension scheme, Early Start Pension initiative, and changes to the Riester pension and Frühstart-Rente system, are aimed at ensuring the long-term sustainability and adequacy of the system, while balancing the need for finance, business, and political considerations within the community policy and general-news landscape.
- The debate about the German pension system highlights the potential impact of demographic challenges and economic changes on employment policies, with economists suggesting the need for real reform, such as expanding the contributor base and modernizing pension provision, in order to stabilise pension contributions and improve pension adequacy by 2050. Finance ministers and economic experts are closely monitoring the progress and implementation of these reforms, and their success may influence future employment policies and general-news discussions.
