European Trade Union Institute, ETUI.

Accueil > Covid Social Impact > Germany > The state of pension reforms - background summary (update...

The state of pension reforms - background summary (updated April 2019)

Characteristics of the German pension system

  • The German pensions system is made up of the state pension (accounting for around 85% of all pensions paid), company/occupational pensions (around 5% of all pensions paid) and supplementary pensions (around 10% of all pensions paid).
  • German state pensions are financed by employer and employee payroll contributions up to 20% (until 2020 and 22% beyond that date), shared equally between employer and employee. Employees are obliged to pay into the state scheme for employees. The statutory state pension is earnings-related and provides a pension of between 40 and 45% of final gross earnings. Individuals who are not in an employment relationship may be given credits in the system for a certain period of time in order to enable them to accumulate entitlement. This can include parents on parental leave and women who leave work to care for a family. The state pension has undergone a series of reforms over the past 15 years (see below).
  • Voluntary company/occupational pensions (betriebliche Altersversorgung) are a benefit granted by a company to its employees. These schemes were given a boost by legislative reforms in 2002 (see below), which included tax-favourable treatment of employee contributions. Most of the company schemes in operation are defined benefit, although there is a trend towards defined contribution models. Arrangements are usually negotiated at company level with the works councils. Many employees have taken advantage of the option for pay conversion (Entgeltumwandlung), which is also known as deferred compensation. Most do this through collectively-agreed arrangements, under which elements of pay such as holiday bonuses or capital formation payments are used to buy additional entitlements.
  • Individuals can also contribute to private supplementary pension schemes, independent of state or company schemes in order to help them to offset future cuts in the value of the state scheme. These encompass some employer schemes and some industry-level negotiated schemes. Saving into these schemes is voluntary, but there is a recommended minimum contribution of 4% of pay in order to benefit from incentives such as tax concessions. These schemes are sometimes called ‘Riester’ schemes, after the minister of labour in post at the time of the 2002 pension reform which created incentives for these schemes (see below).

Pension reform in Germany

  • The German pensions system has undergone a number of reforms in recent years, aimed at raising the normal retirement age, lowering the level of the state pension in relation to final earnings, and creating incentives for company and supplementary pensions. A key reform took place in 2002 as the value of the state pension was lowered in relation to final earnings. In addition, this reform created incentives for individuals to save in supplementary and company schemes. It also cut the value of the survivor’s pension from 60% to 55% of the insured person’s pension.
  • In 2005, the Old Age Income Act altered the taxation of pensions and pension contributions, with the aim of making contributions tax-favoured and pensions taxable. Accordingly, as of 1 January 2005, 60% of state pension contributions were tax-free, of which 50 percentage points are the employer contribution, which is already tax free. In practice, 20% of the employee’s contribution was tax-free. From 2005, 50% of the state pension was taxable and by 2040, the whole pension will be taxable.
  • In 2007, the normal retirement age was increased from 65 to 67 in stages by 2029. Accordingly, it increases by one month a year from 2012 for those born in 1947 or after. For those born after 1959 it rises by two months per year. However, those with 45 years of insurable employment will continue to able to retire on a full pension at the age of 65. 
  • The current government started in 2018 with a coalition’s agreement that included social policy measures with the aim to stabilise pensions and increase residents' purchasing power. In September 2018, the legislative process of the so-called ‘Pensions Pact’ was finalised. The pact entered into force on 1 January 2019 and has four basic components. The first part of the agreement stabilises, at least until 2025, the level of statutory pension payments at 48% of the average net income and that of the contributions at 20% of gross income. As a consequence, the contribution of the government will increase as from 2021. Secondly, the coalition parties agreed to increase the pension benefits of families with children. Thirdly, low-paid workers are compensated for their low-pay by a reduced contribution level to the pension scheme. Fourthly, the disability pension benefits will be improved. An earlier proposal to work with a 46% level was sharply criticised by the trade union movement.

Industry pension schemes

  • Pension reforms of recent years have resulted in sector-level bargaining on industry-wide pension schemes, based on pay sacrifice. For example, in the metalworking industry, a pension scheme known as the “MetallRente” was set up in 2001 by the industry trade union IG Metall and the sectoral employers’ association Gesamtmetall. In 2015, around 44,000 pension contracts were concluded in the industry, of which 95% were voluntary occupational pension schemes and 5% private ‘Riester’ schemes. MetallRente estimates that in 2015 32,500 companies in the sector were offering their employees pensions within the framework of the industry scheme.
  • It was estimated that at the end of 2015, a total of 18 million workers were active members of an occupational pension scheme (nearly 60% of workers that are employed and subject to social insurance contributions in the country). The total coverage has slowed in recent years. On 1 January 2018, ‘The Act to Strengthen Company Pensions’ came into force in Germany. The legislative bill should make it easier for small and medium-sized enterprises to set up a company pension scheme, and provides a fiscal incentive for employees on low salaries to contribute to a scheme of this kind. The aim is to boost the number of people covered by these schemes.