Germany struggles to fix its pension system

Time of India

14-05-2025

German Chancellor Friedrich Merz, right, and German Finance Minister Lars Klingbeil (AP)
Germany's baby boomers are retiring. Those born between 1955 and 1969, when the birth rate was at an all-time high, are also living longer. The workforce is not growing at the same rate.
So who will pay the elderly's pensions? A considerable chunk of the federal budget goes into propping up the statuary pension system and the new Labor Minister,
Bärbel Bas
from the center-left Social Democratic Party (SPD), has reiterated an idea of how to partially fix that.
The pension system in Germany, established in 1889, is based on a public retirement insurance scheme in which the pensions of current retirees are paid using insurance contributions from the currently employed, a system known as the "intergenerational contract."
The self-employed are not obliged to contribute; they can pay into the state pension system voluntarily or opt for a private pension.
The public pension scheme, also referred to as
statutory pension insurance
, is mandatory only for employees. The self-employed may pay into the state system or rely entirely on private insurance schemes. Civil servants have their own pension system. These two groups make up around 12% of the working population.
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Many left-leaning politicians insist the only way to save the state-run system is by forcing all members of these well-paid groups of people to pay into the state retirement fund.
Bärbel Bas floats an old idea
The new Minister of Labor and Social Affairs, Bärbel Bas, of the center-left Social Democratic Party (SPD) has again floated this idea.
"We need to involve more people in the financing of the pension insurance," Bas told the newspapers of the
Funke Mediengruppe
at the weekend.
"Civil servants, members of parliament and self-employed people should also pay into the pension insurance scheme," she said.
Her proposal ruffled feathers with the SPD's coalition partners, the center-right Christian Democratic Union (CDU) and Christian Social Union (CSU), who dismissed it as unsuitable as a short-term solution.
Germany's new coalition government has vowed not to cut
old-age pensions
, or increase pension contributions or raise the age of retirement beyond the planned increase to 67 by 2029.
Pensioners constitute a considerable and growing voter base, especially for the SPD, CDU and CSU.
But the outlook is grim: At the beginning of the 1960s, there were still six actively insured workers for every old-age pensioner. Now that ratio is 2:1, and sinking further.
Germany's statutory pension system, explained
A contribution of 18.6% of an employee's gross monthly salary goes into the state retirement fund, with the employee and the employer each paying half.
The monthly contribution cannot exceed €1,404.30.
The government expects the contribution rate to rise to 20% from 2028, going up to 22.3% by 2035, where it expects it to remain until 2045.
The current "pension level" — the amount paid to retirees each month — is 48% of the average monthly salary in Germany, a percentage the federal government wants to guarantee in law until 2040 with the "level protection clause."
In 2023, the average old age monthly pension in Germany was €1,550, according to the German Pension Insurance.
What if the state pension isn't enough?
Current figures from German Pension Insurance show that 61% of pensioners receive less than €1,200 net per month from their statutory state pension. One in three pensioners receive less than €750 net.
Many women in Germany receive much lower pensions, or none at all. That's because they worked in low-paid jobs, and many also spent years at home as a stay-at-home wife, often not returning to work long after having children.
Reentering the labor market after many years isn't easy, and for many a pension isn't enough to make ends meet. They either work to supplement their pensions or receive state welfare benefits.
In addition to the government-run statutory pension insurance system, there are also private company plans and several options for private individual retirement investment plans.
As well as periods in contributory employment, time spent raising children, in education, unemployment or illness also count toward pensions.
Foreigners who worked and paid contributions in Germany for more than 60 months are entitled to receive a German pension after reaching the official German pensionable age
Awaiting new proposals
The new government has agreed to have a pension commission to be set up and make reform proposals. This would now happen swiftly, according to Bas.
The previous Finance Minister Christian Lindner of the neoliberal Free Democrats (FDP) had suggested that the government should take out a loan of initially €12 billion annually and invest it in the stock market. By the mid-2030s, Lindner said the stocks should be worth at least €200 billion to help support the statutory pension scheme.
At the time, the SPD was lukewarm on the idea, the CDU/CSU which was then in opposition, dismissed the proposal as insignificant.