Pensions in Germany: How the new government plans to solve an age-old issue

Germany's ageing population continues to cause uncertainty about the future of the pension system. Here's how the new government is planning to make ends meet.

Elderly couple in Berlin Tiergarten
An elderly couple walk through Berlin's Tiergarten. Photo: picture alliance/dpa/dpa-Zentralbild | Monika Skolimowska

The issues with Germany’s pensions pot are well documented. Thanks to the country’s ageing population, over the next 10-15 years, a huge number of people will go from being tax payers to pension recipients, creating a troubling imbalance between people paying into the system and people drawing money out.

It’s a problem that has been plaguing German politicians for years – and one that undoubtedly played a key role in coalition negotiations between the pro-business FDP and centre-left Green and SPD parties in November last year. 

Now the so-called traffic light coalition is in government, these previously uneasy bedfellows are certain they have found the secret to solving the pensions issue. Like much of the trio’s coalition plans, it’s a multi-pronged solution that melds ideas from the left and the right. 

Speaking to DPA on Thursday, Labour Minister Hubertus Heil (SPD) seemed confident that he could deliver the coalition’s promise of a stable pension rate without escalating costs to either employees or the state. “The decisive battle to stabilise pensions is taking place in the labour market,” he told reporters. 

From 2025, when large swathes of the babyboomer generation will enter retirement, the imbalance won’t be solved with hiked-up contributions and state subsidies, the SPD politician warned.

“What is needed above all is to have as many people of working age in well-paid work as possible,” he explained. 

A demographic problem

In a key manifesto pledge ahead of the federal elections last September, the SPD vowed to maintain state pensions at 48 percent of average salaries, with contributions capped at 20 percent of gross pay. 

The party has also promised no further increases in the pensions age during this legislative period. Under the CDU/CSU-led Grand Coalition, legislation was passed to gradually increase the pension age to 67 by 2029. 

Nevertheless, critics claim the SPD’s pledges are out of step with the reality of Germany’s demographics. There are currently around 21 million pensioners in Germany, making up a quarter of the population – and according to the Federal Office of Statistics, the largest cohort of workers is currently aged 55-60. By 2035, most of these working adults will be 70 or over.

The upshot is that the economic balance is set to shift in the coming decades. While currently working-age people outnumber pensioners by a ratio of three to one, this is expected to narrow to three to two by 2060. Soon more people than ever will be withdrawing from the pension pot, and it’s unclear whether the contributions of working-age people will be able to keep up. 

READ ALSO: Germany plans reforms to avoid double taxation on pensions: What you need to know

The president of the German Employers’ Association (AGV), Rainer Dulger, has accused the incoming coalition of shirking much-needed reforms to the pension system. “Politicians are flying completely blind,” he told DPA. 

According to the AGV’s calculations, ruling out a rise in the pension age and keeping the rate stable at 48 percent of gross pay can’t be done without increased contributions or heavy government subsidies. Even at today’s ratio of workers to pensioners, around €100 billion of public money is funnelled into topping up the pension pot each year. 

A two-pronged strategy 

For Labour Minister Heil, the key to squaring this circle lies in the traffic light’s coalition’s double-pronged strategy. 

As well as promoting well-remunerated jobs on the labour market to ensure that people make larger contributions, the government will also incorporate an equity pension fund, which they hope will push up reserves.

Labour Minister Hubertus Heil

Labour Minister Hubertus Heil (SPD) speaks in an interview with DPA on January 6th. Photo: picture alliance/dpa/dpa-Zentralbild | Britta Pedersen

READ ALSO: Wages, rent and pensions: What will the new German government mean for your wallet?

At the moment contributions are 18.6 percent of German employees’ gross salary, with the employer and employee each paying half of the contribution. The aggregate contribution rate will increase to 20 percent by 2025. 

Under the new government’s plans, insured employees will soon pay around two percent of their gross wages into a new equity pension pot and about 16.6 percent into a pay-as-you-go system, divided into employee and employer contributions. This was a key win for the FDP, who had pushed for a Swedish-style system where pension funds are invested in lower risk stocks. 

Heil said an initial sum of €10 billion would be invested on the capital markets. 

“We are stabilising the old-age provision financially by building up the capital stock,” he explained. “And we will do our homework on the labour market at the same time.”

Growing number of workers

In terms of the labour market, there’s also a decent amount of good news to counteract the doom and gloom.

One key positive is that, in recent years, the labour force has actually been growing – and Heil expects this trend to continue. 

According to the pensions office, the share of employees between 60 and 64 who are paying into the pension funds rose from 10 to 42 percent from 2000 to 2019. Over the same period, the average of number of years that people pay into the pension pot rose from an average of 27.7 to 36.3 years, in part due to an increasing number of women in the workforce.

Police officers

School pupils watch police officers training a police dog in Gotha, Thuringia. Photo: picture alliance/dpa/dpa-Zentralbild | Martin Schutt

Another major factor in this development is the number of skilled immigrants who are now paying into the German pension scheme. Within two decades, the number of foreigners in the German pension insurance scheme rose sharply from 2.8 million to 6.8 million. “These developments have led to rising revenues in the pension insurance scheme,” a spokesperson for the pensions office told DPA.

The traffic light parties have included a number of pro-immigration policies in their coalition agreement, including plans to make it much easier for people to settle in Germany, get their qualifications recognised and become German nationals. 

With this welcoming approach, the government appears to be hoping to encourage much more migrants of working age to come to the country and help prop up the social system as the ageing boomers enter retirement. 


The ‘catch-up’ factor

With the next pension increase scheduled for July 1st, Heil is keen to get the so-called “catch-up” factor underway after the slump of the pandemic.

The catch-up factor refers to the government’s attempts to recoup the funds used to avoid a cut in pensions in 2021, when the Covid pandemic was inflicting its damage on the nation’s economy.

As the economy bounces back and wages increase, the Ministry for Labour and Social Affairs plans to raise pensions by a smaller amount than previously predicted in order to pay for the averted pension cut. 

Nevertheless, according to estimates, there will still be “a strong pension increase” this year, Heil said. “This summer, as things stand, that should be an increase of over four percent.” This is slightly under the 4.4 percent that the Labour Ministry had mentioned in November. 

After summer, Heil said that pension development would continue to follow wage development but vowed to avoid pension cuts regardless of the state of the wider economy.  

Member comments

  1. By the time I get close to retirement. It’ll be work until you drop.

    Be smart, source a private pension. Ensure self reliance dont trust a state pension will always be there.
    Hell. If im wrong and you retire with a fully funded private pension. Then the state one will be a bonus. I could live with that.

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Why are card payments getting rejected in Germany?

People are currently unable to pay by card in a number of major German retailers. Here's what's going on.

Why are card payments getting rejected in Germany?

Since Tuesday, numerous retailers in Germany have been operating under a cash-only policy after a major brand of card payments terminal stopped processing payments.

The problem was initially announced by the Konsum retail chain in Dresden, who wrote on Facebook on Tuesday morning: “Attention, an important notice for you! Due to a Germany-wide malfunction, card payments are currently not possible in our stores.”

According to the latest information from Focus Online, several branches of Netto, Edeka and a handful of Rewe branches are affected by the issues. There have also been reports of problems at Aldi Nord, Rossmann and DM as well as some smaller, independent retailers and petrol stations.

People who have tried to pay by credit card, debit card or EC card at these places have reportedly been turned away. 

What’s going on?

The problems with card payments seem to be linked to a commonly used card payments terminal from US company Verifone. According to reports, H5000 card machines at multiple retailers and businesses experienced a software malfunction that stopped them processing payments. 

“As things stand, it will be necessary to install new software updates on all H5000 terminals, which the manufacturer will provide as soon as possible,” the payment service provider Payone said.

“The disruptions are ongoing,” a spokesperson for financial services provider Concardis said on Thursday afternoon. “We’re still waiting for updates from Verifone.”

As of Friday morning, there was no indication of when the problems would be solved, but the card payments processor appeared to be working on a solution.

“We will soon provide a software update for our customers to fix the problem and will inform our customers as soon as it is available,” a Verifone spokesperson said. 

READ ALSO: How Germany’s EC card is set to go digital

How widespread is the problem? 

According to Verifone, thousands of card machines at different retailers, petrol stations and banks across the country are affected. The H5000 terminal is mainly used in Germany, they added. 

However, the Association of German Banks clarified that, though the H5000 terminals were completely out of action, this specific model only accounts for a small proportion of all card machines in Germany. 

“Network operators and technical service providers are working intensively on troubleshooting,” it continued.

Payments processing service Payone confirmed that it was facing issues with the specific H5000 card machine and said that the issues were happening throughout the country. 

“Like other network operators, we are currently experiencing considerable restrictions in the processing of transactions with card payment terminals of the type H5000 from the manufacturer Verifone throughout Germany,” Payone said on Wednesday. 

Financial service provider Concardis warned businesses not to try and fix the problem themselves by rebooting the devices since the card machines needed to be connected to the network in order for the problem to be solved by the manufacturer. 

He said Payone and Concardis were in contact with Verifone and were working to fix the problem.

What should customers do? 

Since card payments may not be possible, it’s a good idea for people to make sure they have cash on them when they go to the supermarket or petrol station in the near future. 

ATMs are apparently unaffected by the problems, so people should still be able to get access to cash. 

Customers are also being advised to clarify in advance at the checkout whether card payments are possible or not – preferably before picking out items.

If card payments aren’t possible, supermarkets and other shops are likely to put up signs at entrances or near the tills, so customers should keep an eye out for those. Petrol stations generally put stickers and signs directly on the pumps when equipment is out of order. 

If customers get caught out with no cash at a retailer where no card payments can be processed, they will generally have to leave the items behind – though some cashiers will be willing to hold the items for when the customers return. 

Things can get trickier at petrol stations, where identity cards, driving licences and health insurance cards can be retained in the event that somebody fills up their tank and is unable to pay straight away.

In some cases, the police can even be called.

READ ALSO: What to know about starting your personal banking in Germany