Pensions System Challenges in the 2025 Election Campaign

The upcoming 2025 Bundestag election campaign is increasingly overshadowed by a pressing issue: the sustainability of the pensions system. Despite the magnitude of the challenges it faces, political discourse appears to be skirting around the subject, prompting concern from various social organizations.

According to the Institute of the German Economy (IW), the situation is dire. An estimated 19.5 million workers, primarily from the baby boomer generation, are expected to exit the labor market within the next twelve years. In stark contrast, only 12.5 million younger workers will be entering the workforce during the same period. This imbalance poses significant risks to the pay-as-you-go pension system, where the ratio of contributors to retirees is becoming increasingly unfavorable. Projections indicate that by 2030, there will be only 1.5 contributors for every retiree, decreasing further to 1.3 by 2050, a stark decline from 2.7 contributors per retiree in 1992.

As a consequence of this demographic shift, pension contributions from both employees and employers are expected to rise. Currently set at 18.6% of gross income, contributions could approach 20% in the coming legislative term. Furthermore, the federal government may need to inject additional funds into the pension system, with the current financial support amounting to about 112.4 billion euros in 2023.

In an effort to address rising costs, political parties with a realistic chance of forming a government are proposing various measures. These include incentives for longer work tenures and increased investment in the capital market to bolster retirement savings through stock market returns. However, key aspects such as the pension level--currently at 48%--and the retirement age of 67 are deemed by parties like the SPD, Greens, and CDU to remain unchanged. For the SPD, maintaining the pension level is a central theme in their campaign.

Understanding the concept of pension level is crucial. It represents the ratio of the standard pension--derived from 45 years of contributions at average earnings--to the average salary. While the current pension level is 48%, this figure does not directly correlate to individual pension amounts. A decrease in the pension level does not necessarily mean a reduction in personal pension benefits due to legal safeguards.

The Free Democratic Party (FDP) maintains its proposal for a statutory stock pension, which would involve partial investment of pension contributions. The FDP argues that this approach is the only viable long-term solution to ensure the financial sustainability of the statutory pension system and potentially increase the pension level over time. They also advocate for a flexible retirement age, suggesting that even low-wage earners could see as much as 500 euros more in monthly pensions through this model.

In contrast, the Greens advocate for a shift towards supplementary capital coverage, which would be funded partially by loans from the federal budget. However, even within the party, there are doubts about the significant impact of such measures. Some party members believe that while capital coverage is essential, its effects on reducing contribution rates will be minimal. Furthermore, there is a push within the Greens to include self-employed individuals and civil servants in the pension insurance system.

The Union party is looking to the future, proposing a capital-funded private pension scheme for children aged six to eighteen. To encourage continued employment, they plan to introduce an "active pension" scheme, allowing for tax-free monthly salary payments up to 2,000 euros. Additionally, the Union is advocating for greater transparency regarding the federal subsidies allocated to the pension system.

Despite various proposals, experts contend that these initiatives may fall short. The ifo Institute for Economic Research has highlighted that establishing a capital-funded supplementary system may come too late, given the financial burdens posed by the baby boomer generation. Both the ifo Institute and the Economic Experts Council have long suggested coupling the retirement age with life expectancy, a strategy successfully implemented in other countries but avoided by major German parties.

Moreover, the Economic Experts Council recommends placing greater emphasis on the sustainability factor in pension adjustments, which significantly influences annual pension increases. As the number of retirees grows more rapidly than that of contributors, pension increases may diminish over the years. They also advocate for an income-dependent scaling of pension benefits to ensure that lower-income individuals receive disproportionately higher pension entitlements compared to their wealthier counterparts.

While the Union party previously supported linking the retirement age to life expectancy, this proposal has not been included in their election platform, raising concerns about its viability in the current political climate.