Pension reform: How the government wants to prevent weak pensions

The federal government wants to protect the more than 21 million pensioners in Germany from a decline in their salaries in the future. “We will prevent this by ensuring that the pension level remains stable for all generations,” said Labor Minister Hubertus Heil (SPD) before the first discussion of the traffic light coalition’s pension reform in the Bundestag.

Without reform and a stable pension level, pensioners would “become poorer” compared to the working population, Heil told the German Press Agency in Berlin. An exchange of blows over the bill from Heil and Finance Minister Christian Lindner (FDP) is expected at the first discussion in the Bundestag this Friday. The opposition completely rejects the plans in their current form. The parliamentary managing director of the FDP parliamentary group, Johannes Vogel, also rushed forward in an interview – in his view, the reform was too expensive. “The pension package is not yet ready for approval in parliament,” Vogel told “Bild”. Heil had originally announced the reform for 2022.

Pensioners are threatened with falling purchasing power

Now, in view of the pressure of the problem, Heil is promoting his reform. Because the baby boomer generation with high birth rates is now retiring and putting the pension fund under pressure. “We have to decide,” said the minister. “This is important not for the coalition, but for the people in Germany, the employees, the pensioners of today and those of tomorrow.” According to Heil, he wants to implement the reform “so that pension increases will continue to follow wage increases in the future.”

Most recently, pensions in Germany rose by 4.57 percent on July 1st – noticeably above the inflation rate for the first time in years. For example, a monthly pension that was previously worth 1,500 euros grew by 68.55 euros. In the previous two years there were also pension increases, some of which were well over four percent – before that, salaries had stagnated due to the Corona crisis. Pension increases are also predicted for the next few years – according to the latest pension insurance report, salaries will increase by 43 percent by 2037. Heil explained that without stabilization of the pension level, the purchasing power of pensioners would decline from 2027.

FDP against increasing contributions

“We now have to ensure that we set the course well beyond this legislative period,” said Heil. “It’s actually about a directional decision.” Heil expects the reform to “contribute to fair performance and social stability,” as he said. “It’s not just about the 21 million pensioners of today.” It is also about the 35 million workers in the country. They deserve a decent pension after a lifetime of work. Heil: “You can’t play with that.”

Although Heil had presented the plans together with Lindner, the FDP parliamentary group is now shooting sideways. Vogel argues that the pension package will cause “contributions for the working middle class to continue to rise.” SPD leader Lars Klingbeil warned the FDP against a blockade. “What we agreed on must come,” Klingbeil told dpa. “I can’t fully understand why the FDP parliamentary group is now rebelling against its own party leader.” The traffic light alliance, which is often divided when it comes to money issues, is likely to find a lot of potential for dispute in the upcoming federal election campaign given the size of the burdens that arise for many people.

Is the money enough?

Today the contribution rate is 18.6 percent of income. Without reform, it is expected to rise to 20.2 percent by 2030 and 21.3 percent by 2040. But the pension level should be secured at 48 percent, so pensions should continue to rise in relation to wages in the country. According to the law, simply securing the pension level would allow the contribution rate to rise to 22.6 percent by 2040. But Heil promises: “We will ensure that contributions do not rise too sharply in the second half of the 1930s.”

This is where the part of the law enforced by the FDP comes into play: generational capital. Lindner speaks of a “breaking point in German pension policy: we will now also invest in securities in the area of ​​statutory pension insurance.” The government wants to take on debt for this, but it will not be counted towards the debt brake. Initially, 12 billion euros, and a little more in the coming years, will flow into the capital stock, including from federal government assets. The facility is expected to grow to at least 200 billion euros by the mid-2030s. From 2036 onwards, an average of ten billion euros will be distributed to the pension fund annually. With the interest from the capital stock, the contribution rate should be reduced to 22.3 percent by 2040. One contribution rate point now brings the pension fund around 18 billion euros a year.

But is there enough money to cover the increasing burden on the pension fund? Pension spending is expected to climb from 372 to 755 billion euros (without reform) or 802 billion euros (with reform) by 2045. At the same time, Germany is currently on the verge of an economic downward spiral and is facing major upheavals, for example due to digitalization. “Especially because we live in stormy times, in times of great change, it is important to give society security,” said Heil. “And that also applies to the statutory pension: that work is worth it, that life’s achievements are worth it, that you have decent pension entitlements in old age if you have worked hard.”

What happens next with your pension?

Heil gives the example of a woman from Saxony, now 49 years old. If she retires in the 1940s, the varying effect of stabilizing the level or dropping the plans would make a difference of 1,100 euros a month more or less in the Saxon woman’s account, he calculated.

And what happens later with your pension? “In essence, the crucial question for the stability of pensions in the future is how many people are in work and employed,” said Heil. Flexible transitions into retirement with more people actually working longer, the participation of women in the workforce, the promotion of training and further education and the immigration of skilled workers would need to be expanded. According to Heil, the normal retirement age, which will rise to 67, should not be affected under any circumstances.