Merz Proposes Abolishing Riester Pension and Increasing Support for Low and Middle Incomes

The future of the Riester pension scheme is uncertain as the new coalition agreement suggests its potential elimination. The government, led by CDU Chairman Friedrich Merz, is exploring reforms aimed at enhancing financial benefits for those with lower and middle incomes while reducing bureaucratic barriers.

The coalition partners, CDU and SPD, have committed to transforming the existing Riester pension into a new retirement product. This initiative aims to simplify the structure of the pension plan by removing bureaucratic obstacles and offering a product that does not mandate guarantees, thereby lowering administrative, product, and entry costs.

The proposed changes seek to broaden the eligibility for state funding, allowing more individuals to benefit from this new pension product. The government intends to provide straightforward state support specifically tailored for earners in the lower and middle income brackets.

The Riester pension was initially designed to assist individuals in maintaining their living standards during retirement. It operates as a private pension plan supported by government incentives, which include direct financial contributions from the state to augment personal savings. These incentives consist of an annual basic allowance and child allowances, among other benefits.

However, the scheme has faced challenges since its peak around 2013, with a significant decline in the number of contracts following 2017. Recent statistics indicate a reduction in both residential Riester contracts and investment fund agreements, reverting to levels not seen since 2016. The number of bank savings contracts has plummeted to 510,000, the lowest since 2007.

Various factors have contributed to this downturn. The Institute for Retirement and Financial Planning (IVFP) highlighted negative perceptions surrounding the Riester pension, with political leaders, including former Bavaria Prime Minister Horst Seehofer, questioning its effectiveness. Critics have also pointed to the scheme's complexity, which can deter potential participants.

Calls for reform have echoed through the insurance industry for years, with the German Insurance Association advocating for a simplification of the subsidy process and better protection measures for beneficiaries. Despite these longstanding requests, previous administrations failed to implement significant changes, leading to a cycle of unfulfilled promises.

As the new coalition takes shape, it remains to be seen whether Merz can deliver on the commitments outlined in the agreement, particularly concerning the Riester pension. The urgency for reform is underscored by the long-standing demand for a viable retirement savings solution that can adequately address the needs of the population.