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Minister: Millions at risk of old age poverty

German Labour Minister Ursula von der Leyen has warned that millions of workers face a bigger risk of ending up with inadequate pensions than previously thought.

Published: 2 September 2012 19:05 CEST
Minister: Millions at risk of old age poverty
Labour Minister Ursula von der Leyen. Photo: DPA

Von der Leyen set out the figures in a seven-page internal letter to the members of the CDU’s youth wing.

“At stake is nothing less than the legitimacy of the pension system for the younger generation,” said von der Leyen in the letter, details of which were published by the Bild am Sonntag newspaper on Sunday.

According to the numbers calculated by her office, workers who today work full-time for 35 years and earn less than €2,500 before tax per month would receive less than today’s basic pension of €688.

This is because of a fall in basic pensions from 51 percent to 43 percent of the average German wage, she wrote.

The minister said those who make no other provisions than basic pension contributions would have to “make their way to the welfare office” on retirement.

Von der Leyen also claimed that those who work full-time for 40 years would need to earn at least the equivalent of €2,200 per month to be sure of a pension higher than the basic amount.

She added that 40 percent of lower-income earners who pay into the mandatory system did not pay into a private scheme.

“Many do not realise that they are also among those threatened by poverty in old age and that there is a compelling need for them to pay into an additional pension if they are to escape the poverty trap,” she said.

The minister calls for a change to her preferred model for the pension system, which she said would provide for a pension supplements to a level of €850. The idea has met with resistance not only from junior coalition partners the pro-business Free Democratic Party, but also from within von der Leyen’s own conservative Christian Democrats.

“It would cost millions,” FDP leader Philipp Rösler told Welt am Sonntag. “We do not have the money for that in the pension fund.”

The coalition is due to decide on reforms to the pension system this autumn.

DPA/The Local/rc

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PENSIONS

EXPLAINED: Is it worthwhile to set up a private pension plan in Germany?

If you’re employed in Germany, you’re almost certainly contributing to your state pension. But it might not be enough to live on in your old age, meaning people often have to put other plans in place to retire comfortably. Here’s why some pick private pensions on top of their public ones.

Published: 19 February 2024 08:50 CET
Updated: 24 February 2024 14:00 CET
EXPLAINED: Is it worthwhile to set up a private pension plan in Germany?

Experts reckon that very few people who work in Germany end up drawing a net pension that will even give them the current average monthly wage – which sits at a little over €2,500 after tax. Those that do will have likely contributed the maximum amount for several years.

“For a typical foreigner, that public pension is nowhere near enough,” Chris Mulder, Co-Founder of Pensionfriend – a private pension provider catering to Germany’s expatriate community – told The Local.

Mulder says this is especially true for foreigners because most Germans who live and work their whole lives in Germany simply won’t have enough to retire on with state pension alone. Foreigners, he says, have to be even more mindful because of the “patchwork quilt” of pension entitlements they might end of collecting from around the world, which don’t necessarily all combine well to provide livable incomes later in life.

But while it might be clear to people that they’ll need more than their German state pension in retirement, why might someone want to invest in a private pension plan in Germany rather than simply investing their own money themselves – perhaps in stocks and ETFs through a depot?

Private pension funds can typically professionally invest your money for you. Photo: Unsplah / Jenny Ueberberg

Yet Mulder points out that investing by yourself through a depot will typically see you pay withholding taxes every year – and capital gains tax every time you sell.

By contrast, if you invest through a private pension plan, you’ll pay only when you take your money out – either all at once or over time – typically later in life when you hit retirement age and have less income.

In addition, if you hold the private pension plan for at least twelve years and you wait to take out your money until after you turn 62 – you’ll only be taxed on half of your capital gain. Tax benefits also increase the longer you wait to take it out.

READ ALSO: How does Germany’s retirement age compare to the rest of Europe?

What about plan costs?

Mulder says that even with the tax advantages a private pension plan comes with, some providers may charge too much in fees to make it worth it.

A good rule of thumb is to see if a potential provider’s fees are less than the withholding tax you would pay if you simply invested the money yourself.

“We work to set ours up in a way that your tax advantage outweighs our cost,” said Mulder of his own company’s offering.

READ ALSO: How long do you have to work in Germany to receive a German pension?

Can you take your pension with you out of Germany?

For state pensions, this obviously depends on where you go. You can take German state pension payments anywhere in the European Union or associated countries – meaning that retiring to the warmer climes of Spain or Italy won’t affect you pension rights. Leaving the EU might come with some limits, depending on where you go to.

Private pensions though, are much more flexible – and you can typically draw them wherever you end up relocating.

READ ALSO: EXPLAINED: Do your pension contributions abroad count in Germany?

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