Pension Stability: Evaluating Costs and Consequences

The German government is making significant strides towards ensuring pension stability, but concerns about the financial implications of these reforms are growing. The coalition between the Union and the SPD is set to implement changes aimed at securing the pension level at 48 percent until 2031. This means that employees can still retire early after 45 years of service, and the standard retirement age of 67 will not be raised further.

Among the proposed reforms are the introduction of a 'Early Start Pension', an 'Active Pension', and enhanced benefits for mothers who had children before 1992. However, questions remain about the feasibility and adequacy of these plans.

Critics have already raised alarms about potential increases in the contribution rate, warning that it could rise to 20 percent during this legislative period. Currently, the rate stands at 18.6 percent, which could lead to higher employment costs for businesses and reduced net income for workers. Experts from the IW institute have also warned that the coalition is heading towards serious financial difficulties.

Veronika Grimm, an economist, stated that the coalition agreement misses the opportunity to make the statutory pension system sustainable in the long run. Meanwhile, the Left Party's leadership has criticized the proposed pension level, claiming that maintaining it at 48 percent perpetuates poverty among retirees, as one in five pensioners is already living in poverty.

The pension level is a calculated figure that represents the ratio of average income to a 'standard pension'. Gundula Roßbach, the head of the German Pension Insurance, clarified that pensions will continue to follow wage developments until 2031 without demographic deductions. However, the aging population is putting pressure on the system, with a decreasing number of workers contributing to the pension fund and an increasing number of beneficiaries. Without changes, projections indicate that the pension level could drop from 48 percent today to approximately 46.9 percent by 2030, and further to 44.9 percent by 2045.

The SPD argues that the current pension level is the limit of what can be tolerated without triggering a crisis. However, establishing a legally mandated higher pension level will require the government to adjust future pensions annually to keep pace with wages.

The costs associated with maintaining the pension level will amount to billions of euros each year, which the coalition plans to offset with tax revenues rather than drawing from the pension fund. Experts predict that the contribution rate could still rise, with estimates suggesting it may reach 19.7 percent by 2027 and 21.2 percent by 2035. If the pension level were to be maintained from the pension fund, the rate would be even higher.

One of the key reforms includes enhancing the 'Mothers' Pension', which is expected to incur additional costs of around five billion euros annually. The proposed changes would allow mothers who gave birth before 1992 to receive three full pension points for each child, bringing them in line with their counterparts who had children after that year.

Looking ahead, the long-term financing of pensions remains uncertain. The coalition suggests that sustainable economic policies, high employment rates, and adequate wage growth will be essential for long-term funding. However, skepticism persists, as experts fear that high expenditure levels could stifle economic growth, creating a cycle that demands even more tax and contribution revenue.

By 2029, the coalition plans to review the situation, with a pension commission set to examine the entire system by around 2027.

Additionally, the coalition has introduced the 'Early Start Pension' initiative, which aims to contribute ten euros monthly into a private pension account for each child aged six to eighteen attending an educational institution in Germany. This program is expected to commence in 2026, allowing individuals to continue saving privately until retirement age.

Furthermore, the 'Active Pension' initiative encourages older individuals to remain in the workforce longer, allowing them to earn up to 2,000 euros per month tax-free after reaching the legal retirement age. Improvements are also expected to the earning opportunities associated with survivor pensions.