Pensions have been a hot issue in Germany for many years, but this week, Chancellor Friedrich Merz himself has reignited the controversy.
“Statutory pension insurance alone will, at best, still provide only basic coverage for old age. It will no longer be enough to secure one’s standard of living in the long term,” Merz said at an event organized by the Association of German Banks in Berlin.
For this reason, additional funded elements of workplace and private retirement savings are essential, the Chancellor said: “And we have that to a far greater extent than at present, based largely on voluntary participation.”
This would mean placing a greater emphasis on stocks and other forms of investing in the future, which would be a controversial strategy, as the stock market is subject to major price fluctuations. Today’s profit may be tomorrow’s loss – and vice versa.
Pension Commission to develop proposed solution
Labor Minister Barbel Baas of the Social Democratic Party (SPD) – Merz’s junior coalition partner to the conservative Christian Democratic Union (CDU) – sharply criticized the chancellor’s comments. He said the outbreak “has given the impression that people should now protect themselves in private.” He argued that many people took Merz’s comments to mean that he “wouldn’t even get a good pension anymore.”
The pension dispute between the CDU and Social Democrats may be a portent of how emotions may soon run even higher. This comes as a pension commission appointed by the coalition is set to present its recommendations by the end of June.
Consequences of an aging society
The main starting points for all models aimed at securing pensions for the future are demographic trends on the one hand and life expectancy on the other. In Germany, as in many other countries, the low birth rate has serious fiscal consequences: fewer working people are contributing to the state pension system, while the number of retirees is increasing.
The Organization for Economic Co-operation and Development (OECD) analyzed the pension systems of its 38 member countries in a “Pensions at a Glance” study. Its main finding: Policy strategies vary widely and are difficult to compare.
The net pension in Germany is below average
If one looks specifically at pension amounts relative to total income after deducting taxes and social security contributions, Germany is in the middle of the pack at 53% – well below the OECD average of 61%. Other European populous countries such as France and Italy reach figures between 70% and 80%.
But there are even more deviations to the downside and upside. In Estonia, Lithuania and Ireland, the state pension level is in some cases below 40%. It is more than double – more than 90% – in the Netherlands, Portugal and Türkiye.
Retirement at 67 is already a reality in the US and Japan
According to the OECD, the age at which people actually end their working lives plays an important role in pension funding. In Germany, people currently retire at an average age of just over 64, which is almost three years earlier than the statutory retirement age for those born in 1964 or later. People who retire earlier generally receive a lower pension.
In some countries, people are already required to work until the age of 67. These include the United States and Japan, the world’s first and fourth largest economies.
From the OECD’s perspective, it generally makes sense to link the start of retirement to increasing life expectancy and thus push it back in many countries.
Higher pension contributions in France and Italy
The level of contributions to statutory pensions varies greatly internationally. According to OECD data, it is about 30% of income in France and up to 33% in Italy. At 18.6%, Germany is well below this average. The contribution is divided equally between the employee and the employer.
One issue that is increasingly coming into focus is poverty in old age. In Germany, the risk is particularly high for people who earned little during their working lives and were barely able to put money aside for private retirement savings. In Denmark, policymakers are attempting to counter this with a tax-funded basic pension.
People in East Germany more affected by poverty in old age
A unique situation in Germany is the contrast between East and West. People who lived and worked in communist East Germany have long received significantly lower pensions than their working years. The slow alignment with western tiers was not completed until 2025 – 35 years after reunification.
Poverty in old age therefore potentially affects East Germans more. The second reason: for example, because of the state-planned economy in the GDR, they had no opportunity to invest in pension funds. After all, unlike capitalism, there were no stock markets under communism.
This article was originally written in German.