Pension system: What Germany can learn from the world pension champion Iceland

It was not until the summer of 2021 that some economists again sharply criticized Germany’s pension system. In a paper, the scientific advisory board of the Federal Ministry of Economics and Technology explained exactly which alarming problems are looming. The experts predict that the state pension fund will face “shockingly increasing financing problems”. The pension at 63, the limitation of pension contributions to a maximum of 20 percent and the guarantee of the pension level introduced in 2018 at 48 percent of the average wage would weigh heavily on the fund.

The basic problem: Too many retirees want money from the coffers, fewer and fewer young people fill it up. The legislature pays the difference from tax revenues – and has to dig deeper and deeper into their pockets for this. In 2020 there were around 57 pensioners for every 100 contributors. In 2030 there should be 67 retirees, in 2050 around 77 retirees, so that. To finance this, employees either have to work significantly longer. Or get significantly less money from the cash register. The FDP wants a share pension, 30 billion euros are to be used on the stock exchange in order to conjure up “enough for everyone” from “too little”. If that goes wrong, we have a problem.

The pension worries the Germans. You have to make private provision, actually. But a study published in October 2021 by the employers’ association Gesamtmetall and IG Metall shows that the interest of 17 to 27-year-olds in private pension savings has decreased over the past decade. In 2010, 55 percent of young people saved, in 2019 the figure was 48 percent.

Pension ranking: Iceland in first place

The shaky financing of the state pension and the uncertainty of future financing bring Germany in an international comparison of all pension systems, the “”, only 14th out of 43rd place. The experts in the study liked the fact that “our pension system is very stable in the areas of adequacy and integrity and that we have been able to improve continuously over the past few years,” said Mercer Germany boss Norman Dreger. In terms of “funding”, however, there is “some catching up to do”, and company pension schemes must be further strengthened. Another recommendation: “Increase the minimum pension for low-income pensioners: inside”.

However, Germany is not alone with its pension problem. Countries like Austria, Spain or Italy buy today’s adequacy of the pension amount with the sustainability of the financing. It is hardly possible that pensions for future seniors will be so high without radical interventions or reforms.

Iceland comes in first place in the ranking. It is followed by the Netherlands and Denmark. What are these European countries doing better?

The pillar model of Iceland

There are two pillars of the state pension in Iceland. On the one hand, there is the old-age pension: for this, pension recipients must be at least 67 years old and have been registered in Iceland for at least three years between the ages of 16 and 66. Those who have lived on the island for at least 40 years receive the full retirement pension, those who have fewer years receive less. A child’s pension can be paid by the Social Insurance Agency for every child under the age of 18. Further allowances can come from there, for example for household support. Before any money is paid out, there is an income test. If the pensioner earns additional income or money from renting, the pension is reduced. If this special income exceeds the pension, it will be completely discontinued.

All employees and self-employed persons aged 66 and over can apply for a labor pension if they were insured by one. There is no minimum insurance period here. Employers and employees make payments together.

As a third option, voluntary contributions can be paid into state-selected and approved pension products. This means that even those who are less familiar with financial and investment products, but want to top up their pension, can participate in this pillar.

That’s how high the pension is

One from 2012 puts the amount of the old-age pension (or basic pension) at a maximum of 393,300 Icelandic kronor, the equivalent of a good 2600 euros. The allowance, i.e. the social pension, amounted to the equivalent of around 8,200 euros per year for single people in the overview. These allowances are withdrawn if the annual earned income exceeds just under EUR 3200, EUR 797 company pension and EUR 655 investment income per year.

These figures can only be compared with Germany to a limited extent, because the cost structure is very different. The health system on the island is free, and people pay little for energy due to the geothermal energy available. The cost of living, however, is around 50 percent higher than in Germany.

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