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Germany announces biggest pension hike in decades

The German government confirmed on Wednesday that it was hiking the state pension by up to 6 percent, but trade unions warned that the increase would immediately be eaten up by inflation.

Published: 13 April 2022 15:52 CEST

Germany announces biggest pension hike in decades

A woman takes money from her purse. Photo: picture alliance/dpa/CLARK

German pensioners are about to receive the highest increase to their payments in years.

Pensioners in west Germany are to receive the largest single hike in their payments since 1983, with the government announcing a 5.35 percent increase that will come into effect on July 1st.

In east Germany, where the pension is calculated differently to compensate for lower wages, pensioners will get an even bigger higher hike of 6.12 percent, the biggest such increase in the former East since 1994.

“The statutory pension is working very well despite the challenges we are facing right now,” Labour Minister Hubertus Heil said on Wednesday.

As a result of the increase, a monthly pension of €1,000 based only on west German contributions will rise by €53 on July 1st, while a pension of the same amount in the east will rise by around €61.

READ ALSO: Could people in Germany soon be working until the age of 68?

But social welfare associations and unions said that Germany’s 21 million pensioners are unlikely to benefit from the increase due to the current high level of inflation.

“The comparatively good pension increase this year will be eaten up completely by rising prices,” said Anja Piel from the German Federation of Trade Unions (DGB).

“Pensioners are massively affected by inflation-related cost increases,” agreed Ulrich Schneider, head of the Paritätischer Gesamtverband. He added that the fact that there had been no rise in pensions in 2021 made the increase seem more impressive than it actually is.

Pensions are adjusted every year on July 1st, depending on wage trends. If wages fall, a legal guarantee prevents the retirement benefit from also falling.

Last year there were no pension increases due to the fact that wages flatlined.

READ ALSO: Pensions in the EU: What you need to know if you’re moving country

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How Germany plans to stabilise pension contributions

Labour Minister Hubertus Heil (SPD) and Finance Minister Christian Lindner (FDP) presented a reform package on Tuesday that is intended to guarantee a pension level of 48 percent for the future — meaning that pensions would equate 48 percent of your average salary over the course of your working time.

Because this costs more money, but pension contributions should not rise too much, additional financing is needed from another source, they said.

READ ALSO: Six things to know about Germany’s new pension reforms

What’s the proposed pension plan?

The German government is to invest billions in the capital market and pay annual subsidies to the pension insurance from the interest earned starting in the mid-2030s, FDP leader Lindner announced. In addition to the contributions and subsidies from the federal budget, the pension insurance scheme thus receives a third source of funding.

According to the draft law, however, this will not be quite enough to prevent an increase in contributions. The German government expects that the pension contribution will nevertheless rise from the current 18.6 percent to 22.3 percent in the next few years due to the aging population. Without investing in the capital market, however, it would even rise to 22.7 percent in 2045.

The plan is for the federal government to build up a capital stock of €200 billion by the mid-2030s, primarily through loans and transferred assets. From the income on the stock market, €10 billion are then to flow annually into the statutory pension insurance.

“This is not the only solution to the challenge of long-term pension financing,” Lindner stressed. But it is a building block that makes a difference.

“For more than a century, the opportunities offered by the capital market in statutory pension insurance have been neglected,” he said. “Now we’re using it.”

Heil and Lindner emphasised that it was not about gambling and short-term speculation. “This is money well spent in the long term,” said the Minister of Labour. It is also not a question of investing citizens’ contributions in shares, but only money from the state.

Why Germany needs to protect the pension level

All people must be able to rely on the statutory pension, Heil stressed. Without the reform, pension levels would very soon decouple from wage developments. This means that pensioners are becoming poorer than the working population.

“We will prevent this by safeguarding the pension level,” Heil stressed. The pension level indicates what percentage of the current average salary someone receives as a pension who has always worked at the average wage and paid contributions for exactly 45 years. When pension levels fall, pensions rise less than wages.

Heil promised: “There will be no reduction in pensions and no further increase in the retirement age.” The statutory pension remains at the heart of old-age provision. For many pensioners, this is the main income and must therefore remain stable.

If Heil and Lindner have their way, the reform package should be adopted by the Bundestag before the parliamentary summer recess in July.

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

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