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Explained: What are Germany’s planned new pension reforms?

Germany's cabinet has agreed on pension reforms that will benefit about 1.3 million people. Here's what it all means.

Published: 19 February 2020 11:48 CET
Explained: What are Germany's planned new pension reforms?
Photo: DPA

There's been months of bickering over plans to introduce the “Grundrente” (basic pension) – but on Wednesday Germany's plans for pension reform took a major step forward.

German ministers officially agreed to the reforms which for a time threatened to collapse the coalition between Chancellor Angela Merkel's conservative CDU and the centre-left SPD.

From 2021 the government will spend €1.3 billion ($1.4billion) a year topping up the basic pensions of around 1.3 million low-income recipients, under a law now approved by Merkel's cabinet for deliberation by MPs.

“The creation of the new basic pension will contribute to more social justice in our country,” said SPD Labour Minister Hubertus Heil.

The two camps in the ruling coalition were at loggerheads for months over pensions in a country facing an ageing population.

A flagship SPD policy which the CDU had sought to block, the reform threatened to blow the government apart before the two sides reached a compromise in November.

READ ALSO: Merkel's coalition reaches deal on Germany's pension reform

Labour minister Heil claimed the reform would benefit “women in particular”, especially those in low-paid service jobs.

He gave the example of a hairdresser who, having worked 40 years at the minimum wage, would see their monthly pension rise from €512 to €960 under the new system.

He added that the top-ups would also be a boon for those in the former communist east, where economic uncertainty and lower spending power have contributed to the rise of the far right in recent elections.

Hubertus Heil in Berlin. Photo: DPA

The reform is above all a victory for the SPD, which continues to languish in the polls despite the surprise election of a new, left-leaning leadership duo in November.

READ ALSO: How to maximize your German pension even if you retire elsewhere

What exactly is the 'basic pension' (Grundrente)?

The basic pension is a supplement or top-up to the pension entitlements of low-income earners who have clocked up at least 33 years of contribution through work, child-raising or caring for relatives. It is intended to help those who currently receive a small pension, and for those at risk of old-age poverty.

The parties agreed on implementing a “comprehensive income test” so that the new system really helps people in need – a previous sticking point for the coalition.

It will be introduced on January 1st 2021 and applies to those who have already retired and future pensioners.

Who will benefit?

About 1.3 million people will receive higher payments starting next year.

The supplement will initially be staggered – at 35 contribution years it will reach its full level. In addition, only those with an income below certain limits will receive a basic pension.

READ ALSO: How does Germany's pension system measure up worldwide

What are the income limits?

The full supplement is paid to those whose monthly income as a pensioner is a maximum of €1250 (single person) and €1950 euros (spouse or partner).

Income above this limit should be credited at 60 percent of the basic pension. With an income of €1300 euros for a single person, €50 would be credited at 60 percent – and the basic pension would be €30 lower.

If the income is more than €1600 or €2300, respectively, it should be credited in full 100 percent towards the basic pension supplement.

For example, if a married couple has an income of €2400, the basic pension is reduced by €100.

How is it requested?

No-one needs to apply for the basic pension – data and income should be checked automatically. But it's a pretty complicated system to work out which will mean Rentenversicherung (pension insurance) employees will have a lot of work to keep on top of.

How is it worked out?

It's complicated but here's a couple of examples published by German broadcaster Tagesschau.

Example one: a secretary in western Germany with 38 insurance years plus two children: only 26 years would be taken into account for the basic pension, because in the other years she received contributions that were less than 30 percent of the average wage. In the 26 years, however, she received 70 percent. Her pension is €754 per month – the basic pension top up would be €75.

Example two: a saleswoman in Dresden with 39 years of work and 60 percent of the average wage without other income receives a pension of €746 – and would get a supplement of €195 under the reforms.

What else is included in the legislative package?

More support will be given to those who have received very low wages. Those who have paid into the pension fund for 33 years, but have earned particularly little and need more support, will receive a tax-free allowance of initially a maximum of €216.

Other support initiatives are also being discussed.

As you can imagine, none of this is cheap: the total costs for the government for the legislative package are slated to rise to €1.9 billion in 2025.

It will be financed from tax revenues, but how this money will be raised – and if it will result in higher taxes for workers – is still unclear.

Is everyone happy?

According to the DPA press agency, trade unions and social organizations have welcomed the basic pension plans, but believe proposals could go even further to benefit low-income citizens.

Meanwhile, employers say the plans do not target poverty in old age enough – and say they are too expensive.
 

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PROPERTY

Why buying property in Austria remains unaffordable for most

Buying a home in Austria is a dream for many international residents, but it remains out of reach for the average earner.

Published: 7 May 2024 12:30 CEST
Why buying property in Austria remains unaffordable for most

Many people living in Austria dream of one day owning a home, but despite recent drops in property prices and interest rates, this dream is still out of reach for many average earners. 

In Austria, it is recommended to not spend more than 40 percent of a monthly income on debt repayment.

But new analysis by tariff comparison portal durchblicker.at reveals that even a double-income household would need to spend around 60 percent of their income to afford a 90m² new-build apartment in Vienna.

While the government has created initiatives to improve the affordability, with attractive housing packages, fee reductions and eliminations of certain fees, such as the “Grundbucheintragsgebühr” (land register entry fee) and “Pfandrechtseintragungsgebühr” (mortgage registration fee) for properties up to a certain value, their impact has been limited.

Furthermore, the governments initiatives often overlook the specific needs of lower-income households and may benefit those who are already financially stable, leaving the average earner still struggling to afford a home, according to Der Standard.

READ ALSO: ‘Haushaltsversicherung’ – How does Austria’s home insurance work?

High prices, rates and strict lending criteria

One of the biggest barriers to owning a home in Austria is simply the sky-high property prices. Over the years, property prices have increased, making it more difficult for people with an average income to afford a place of their own. Even with recent minor dips in prices, they still remain high.

Another factor making owning a home challenging is the increase in interest rates in recent years. As a result, both existing variable-rate loans and newly obtained fixed-rate loans have become more expensive. Analysts expect the European Central Bank to cut interest rates by around 0.5 percent in the near future, but according to durchblicker’s calculations, this would initially only create a little relief for loan takers, where instead of around 60 percent, 55 percent of monthly household net income would be needed for debt repayment.

Another issue preventing many from realising their dream to buy a home is the difficulty in obtaining a mortgage. Since July 2022, stricter rules have applied in Austria for the granting of property loans. Loan applicants must have a deposit worth at least 20 percent of the value of their property to be granted a loan, according to the financial online platform Finanz.at. This means that even applicants with higher incomes may struggle to get their dream financed. 

Furthermore, many loan takers with variable-rate loans, especially those recently obtained, are facing significant challenges. The variable interest rates have increased significantly since the initiation of these loans, resulting in higher monthly repayments, reported Der Standard.

Few people can afford their own home in Austria, especially in Vienna. Photo by Christian Lendl on Unsplash

Experts suggests fixed rate loans and cooperative housing models

Andreas Ederer, Head of Banking at durchblicker.at, recommends loan takers with variable-rate loans to change to fixed-rate loans. He suggests that fixed-rate loans have become more attractive as they are currently cheaper than variable-rate loans, reported Kurier. 

Unlike fixed-rate loans, which have a steady interest rate throughout the loan term, variable-rate loans can change over time in response to shifts in market conditions or the economy.

Experts also suggest alternative models for increasing affordability. One idea is to create more opportunities for cooperative ownership with mandatory purchase options. This could offer a more affordable option where costs such as maintenance and taxes are shared. According to Der Standard, cooperatives also often have access to loans with better terms.

READ NEXT: How can I move into affordable cooperative housing in Vienna?

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