Legislation on pensions advances: Government takes proposal to the streets for approval
German Pension Reform Unveiled: A Closer Look
The German government has proposed a comprehensive pension reform aimed at securing the long-term sustainability of the pension system and improving benefits, particularly for parents. The reform, approved by the federal cabinet, includes several key elements.
Extension of the Pension "Holding Line"
The government plans to maintain the current pension level at 48 percent of a retiree’s net income during their working life, a guarantee previously secured by law until 2025. This threshold will now be extended until 2031 to ensure pension adequacy.
Increase in Pension Contribution Rates
To finance the guaranteed pension level, pension contribution rates will rise by 0.2 percentage points starting in 2027, from 18.6% to 18.8% of income. This increase will be evenly split between employer and employee, amounting to 9.4% each.
Enhancement of the Mother’s Pension
The reform plans to increase pension benefits for parents, mostly mothers, who raised children before 1992 by about 20 euros per month per child. This measure compensates those who took time off work and paid less social security contributions. The estimated annual cost of this measure is 5 billion euros.
Additional Reforms and Financing Plans
The reform package includes measures to expand statutory social security participation, potentially extending it to self-employed individuals and civil servants. A "Second Occupational Pensions Strengthening Act" is forthcoming, aiming to bolster company pensions. The reform also includes schemes such as “Active Pension,” allowing retirees to earn up to €2,000 per month tax-free, and “Early Start Pension,” supporting children’s private pension accounts.
Other Provisions
From 2027, parents of children born before 1992 will have three years of child-rearing time credited to their pension instead of the current two and a half years. The reform will standardize the child-rearing credit for pension purposes, increasing it from two and a half years to three years for children born after 1992. This affects around ten million people, mainly women.
The pension expenditures are projected to increase due to more elderly people retiring and fewer young people paying in. To address this, a commission is to be set up in 2026 to work out proposals for more fundamental reforms on how the pension system will be financed in the long term.
The pension contribution rate is expected to rise to 18.8% of gross wages in 2027, due to the buildup of reserves and increasing expenditures of the pension insurance. The increase in the contribution rate from 2027 onwards is not expected to result in direct payments from the federal government to the general pension insurance.
The additional funding for the pension level stabilization is estimated to cost around 3.6 billion euros in 2029, 9.3 billion euros in 2030, and 11 billion euros in 2031 from the federal budget. The financing of the better parental allowance will cost taxpayers around five billion euros per year from 2027.
The law does not include a proposal to raise the retirement age to 70, as previously suggested by Economics Minister Reiche. The pension law is expected to pass in the Bundestag by the end of the year. The reform will make it easier for seniors to continue working for their employers in retirement.
Social Minister Steffens has announced that further pension packages will follow, including strengthening the company pension, the 'active pension' with incentives to work in retirement, and the 'early start pension' with state support for old-age provision already in childhood. Steffens has also proposed ideas for an employment insurance, but faced criticism for a similar proposal a few weeks ago.
- The German pension reform, announced in the context of general-news, encompasses economic and social policy measures, such as the financing of the guaranteed pension level through an increase in pension contribution rates, essentially a business matter touched by politics.
- The proposed pension reform, discussed in the realm of political and economic debate, includes plans for expansions in statutory social security participation (for the self-employed and civil servants) and proposals for incentives like the 'active pension' and 'early start pension', matters that intersect both business and finance.
