The new pension package contains two big changes. These are the effects on your pension – and your professional life.
On Tuesday, Social Minister Hubertus Heil and Finance Minister Christian Lindner presented their draft law on the pension package. It is still a draft, but something can still change in the parliamentary process. But the two crucial changes will probably remain: a so-called holding line at the pension level of 48 percent and generational capital. What is behind these terms:
What will change in the amount of my pension?
If the draft law goes through, it will have an impact on pensions until 2039. The pension level must not be lower than 48 percent. However, the pension level does not refer to the amount of the pension in relation to the person’s last income, as many payers incorrectly assume, but rather it is the ratio of a standard pension (45 years of contributions with average income) to the current average income. A “standard pensioner” should receive 48 percent of the current average income in the year of retirement. The idea behind it: pensions should reflect wage developments. Until now, this so-called holding line for the pension level of 48 percent was only set until 2025. Now it is valid longer. Labor Minister Heil calculates: A 57-year-old nurse who earns 3,100 euros a month and retires in 2032 after 45 years of work would receive around 1,500 euros instead of around 1,450 euros through the law.
What will change in terms of financing?
So far, the pension has been paid for from contribution rates and the federal subsidy. The contribution rates have been 18.6 percent since 2018, which employees and employers share equally. If more people are retired, either the contribution rates must increase (and employees pay in more), or the federal subsidy from tax revenues must be increased. Alternatively, the level would have to be lowered. However, the latter would be excluded until 2039 with the new law.
The contribution rates should remain stable at 18.6 until 2027. After that, however, it is foreseeable that they will increase – employees will then have to pay more of their salary into pension insurance. In order to keep the increase in contributions as small as possible, the federal government would like to create so-called generation capital. The federal government wants to take out loans and invest money on the capital market through a politically independent foundation. In 2024 that should be 12 billion euros, but the annual amount is expected to increase by three percent over the years. In addition, it is planned to transfer federal investments that are not in the public interest to generation capital. It is not yet known what these could be.
The basic idea is the same that is causing more and more people to switch from savings accounts to the stock market: relatively consistent returns can be expected on the capital market in the long term. And the interest that the federal government has to pay on loans is lower than the return. Finance Minister Christian Lindner expects that with returns and compound interest, an amount of at least 200 billion euros can be saved by 2036, which can relieve the burden on pension insurance from then on. Each year only the income, i.e. around 10 billion euros, should be withdrawn from the fund. The ministries expect that thanks to these subsidies the contribution rate will be reduced by 0.3 percentage points. According to current plans, it would then be 20 percent from 2028 and 22.3 percent from 2035. Without generational capital, according to the ministries, it would also increase by 22.7 percent by then.
And what about the stock pension now?
According to Christian Lindner, generational capital should be a “real paradigm shift”. But in fact it no longer has much to do with the stock pension desired by the FDP. With stock pensions, part of the individual pension contributions (around 2.5 percent of the 18.6 percent contributions) should flow directly into the capital stock, which should be invested in the stock market. In models such as the Swedish stock pension, each citizen can be allocated their exact shares of this capital and receives an additional pension directly from it. The coalition partners SPD and Greens prevented this stock pension. Generational capital is a classic compromise.
What about the debt brake?
This doesn’t matter for generational capital. The government argues that loans would be taken out on the capital market to set up the foundation, but these would be offset by real assets because securities would be purchased with the money. The generation capital does not burden the federal government’s assets.
What do I have to do now?
It’s best to continue saving yourself. No reform of statutory pension provision will mean that you can rely solely on the statutory pension. You should therefore definitely save privately for retirement. And find out about company pension schemes, which are often tied to insurance contracts that provide extremely little return. By the way: The coalition is also planning reforms for these two pillars of pension provision. According to reports, there could be relief for fund and stock savings plans in the future.
Source: Stern
