Growing salaries: 3.5 percent more – pensions and government chaos

Around 3.5 percent more – that is the official forecast for the pension increase in Germany on July 1st next year. While the Union and SPD factions in the Bundestag were holding crisis meetings about the government chaos at an early hour, someone in the Federal Ministry of Labor, about a kilometer away, headed by department head Hubertus Heil (SPD), pressed the button and emailed the long-awaited draft of the 2024 pension insurance report to be coordinated with the others Departments.

The forecasts of the official estimators provide new fuel for the actors who are currently trying to continue to govern Germany despite political chaos.

Is 3.5 percent more a lot?

Oh well. For example, with a pension of 2,000 euros, it is around 70 euros more per month. However, the inflation rate is low, so there is a good chance that inflation will not immediately eat up the pension increase. In September 2024 it was only 1.6 percent; by August the rate of change had already fallen below two percent.

The last time the inflation rate was lower than today was more than three years ago, in February 2021. The reason for the subdued inflation is “in particular the renewed decline in energy prices,” as the President of the Federal Statistical Office, Ruth Brand, explains. But last July, pensions rose even more than now predicted for 2025: by 4.57 percent.

Are the 3.5 percent safe for pensioners?

Not yet. It will not be until spring 2025 that the Federal Cabinet will determine how pensions will actually increase – depending on the current economic situation and wage developments. A year ago, the estimators were also wrong and predicted an increase that was more than one percentage point lower than it actually was.

Where exactly does the 3.5 percent come from?

The number is mentioned somewhat hidden in the pension insurance report in overview B 14 on page 47. All forecasts from the report were created by a group of estimators made up of experts from the pension insurance, the Federal Office for Social Security and Heil’s department. They took a close look at wages, salaries and the country’s economy.

The most recent pension increase in the summer was nationwide for the first time – previously there was a gap between pensions in East and West for decades. The fact that the pension insurance report comes out on day two after the traffic light break is primarily due to the regular estimation processes, as it was said.

Is the pension increase wobbling because of the government chaos?

No. The pension development and its calculation are determined by law and Germany will always have at least one caretaker government that can pass relevant regulations.

What is the impact of the weak economic situation?

The money for the pension fund, as it now flows from contributions and taxes, will not last as long as previously thought. As of today, the contribution rate is likely to rise as early as 2027 – from 18.6 to 18.9 percent. Previously it was assumed that it would not rise until 2028. Reason: The development of premium income remains significantly behind the summer assumptions.

What effect do traffic light savings decisions have?

Here it is primarily the lower tax subsidies that have a negative impact on premium development. Less taxes for pensions and higher contributions: That’s how you can summarize it. The pension decisions of the growth initiative, which the now ended traffic light government developed, also bring higher costs. Employees should receive a higher pension if they work beyond the normal retirement age – through a “pension deferral bonus”.

If you work for at least a year longer, you can have the higher entitlements paid out in one fell swoop. The bonus should be allowed to be saved for up to three years and paid out at the start of retirement.

What matters now?

On the longer term development. More and more baby boomers are retiring. Around a third of those eligible to vote in Germany have already reached retirement age. That costs. At the same time, new pensioners no longer have to pay contributions. The traffic light therefore wants to keep the pension level stable at 48 percent until 2039, i.e. the ratio of pension to wages in Germany. This was particularly important to the SPD and the Greens and would ensure that pensions remained stable – although it would cost several billion more.

So that the contributors, i.e. companies and the insured, are not overwhelmed, the government wants to generate new interest. To this end, federal debt is to be used to build up a capital stock for investment on the stock market. The FDP fought for this. The traffic light parties had been arguing about the pension package for months.

What effect do the reform plans have?

The estimators also took this into account. They assume that from 2036, income from the stock market investment known as “generational capital” will be distributed to the pension fund – amounting to ten billion euros annually. In the long term – this is the conclusion – the negative effects of recent austerity measures and the economic situation would therefore not have such a strong impact.

However, it is unclear whether the reform package will come after the FDP left the government coalition. The SPD and the Greens lack a majority in the Bundestag. The Union had already presented its own, completely different pension ideas.

How does the pension minister act?

Despite the traffic light being off, Heil announced that he would still like to get the pension package introduced by former finance minister Christian Lindner and him through the Bundestag. He said in a ZDF “special” that he would ensure that the reform continued. He is counting on decisions being made this year that Germany needs and that should come into force at the beginning of next year.

Heil said he would work hard to get majorities for the pension package. “We will fight for them too,” announced the SPD politician. CDU leader Merz made it clear again in the Bundestag that the Union is calling for quick new elections. The SPD and the Greens do not want to serve as majority procurers for individual laws.