A more sustainable retirement
It all started in 2007. At that time it was predicted that retirement would cause demographic problems. Because people are getting older and having fewer children. Therefore, it was introduced that retirement would start gradually later and later. It will be completed in 2031; If you want to retire without deductions, you have to wait until your 67th birthday. But this alone does not balance all demographics. If in 1990 there were 27 contributions for ten pensioners, in 2007 there were only 21 contributions – and in 2035 there will probably be 18 contributions. To keep fees affordable, so-called “sustainability factors” were introduced. The rule states: If the ratio of contributions to pensioners changes, one fourth of this change affects the pension amount. Even though pension insurance increases its contributions, the growth of pension funds is slower. The impact is that pensions will grow more slowly in the long term than the wages of the working population.
High pension increase
In fact, sustainability factors did not initially slow the rise in pension funds. In the 1900s, unemployment became smaller, more women worked, and immigrants came to the country, started working and paying pension insurance contributions. Sustainability factors have even boosted overall pension funding in 2024, the Federal Audit Office found. A standard retiree who has paid contributions on average for 45 years will receive 1,836 euros this year; Without the sustainability factor, the cost would paradoxically be ten euros less. But Germany is now experiencing economic difficulties, labor migration is declining, and more and more baby boomers are retiring.
Increase safe
In 2018, under pressure from the SPD, a regulation was introduced that stated: The standard pension must not fall below 48 percent of the average wage. Currently, this rule is valid until 2026, and is now coming into force: pensions have reached 48 percent of the average wage. From now on their wages will remain at 48 percent, and that also means their wages will continue to increase at the same pace as the average wage. In the coalition agreement, the Union and the SPD not only agreed to expand mothers’ pensions. They also stipulated that the 48 percent floor should remain in place until 2031, meaning pension funds would grow as fast as salaries. Only people who will be retiring by then will benefit from the current bill. Economist Martin Werding did the math further: If these limits were implemented indefinitely, everyone currently at least in their mid-to-late 40s would benefit, depending on his assumptions. Anyone in their early to mid 40s or younger will pay for it.
Our graph shows how large additional pension increases are likely to be. The maximum amount is several dozen euros per pensioner. Overall, the numbers add up: in 2031 alone, pensioners will receive a total of 26 billion euros more because of this regulation. It is paid for by contributors and from the federal budget, including all taxpayers. Next year, one-third of all federal tax revenues will go to pension insurance as subsidies. This is intended to cover pension payments that are not offset by contributions. In this way, civil servants and self-employed individuals also participate in payments that only those insured by statutory pension insurance receive.
What happens after 2031?
It is unclear what will happen after 2031. Currently, sustainability factors are planned to be reapplied for further development. Young Union MPs protested this: They wanted higher pension increases in interim years to be compensated.
What does it mean? Pension funds won’t increase that fast. The FAS has calculated based on the current estimates of the Ministry of Social Affairs: This adjustment means that the pension fund will probably not decrease in any year, but will only increase by six euros in 2032. Now the forecast is very uncertain. It could be that wages increase more quickly and the amount of contributions is greater, so the increase in pension funds will also be higher in 2032. However, things can also happen that don’t go well. This can mathematically result in a reduction in pension funds. However, this could be replaced by zero rounds and smaller increases in subsequent years, as occurred during the pandemic.
Currently, the difference for a standard individual pensioner is estimated at around 50 euros per month. In total, the amount amounts to 15 billion euros per year, which is around 150 billion euros in 2040. Now the question is whether the law will remain the same until 2031. The coalition promises further pension reform once a commission is completed. But even the pre-determination of 2031 then becomes a bargaining chip, and whoever has it is very important – and of course there is symbolism in that.
the bill
For the graph, we used federal government forecasts based on the latest pension insurance report from the Ministry of Social Affairs. The so-called “medium wage and employment variance” was chosen for this long-term forecast: wages rise annually by three percent before inflation; Migration and demographics have been predicted by experts. Pensions are estimated according to the federal government. This amount refers to 45 retirement points. For example, you get it with 45 years of service at the average wage, but also with 30 years of service at one and a half times the average wage. FAS has calculated how the pension amount would have developed without the coalition decision based on information from this report. Price increases are projected to be around two percent per year in the coming years. If prices rise more quickly, higher wages are also possible, although not certain.
