For German Economy Minister Katherina Reiche, there’s a simple way to fix Germany’s pension system: “We need to work more and longer,” she flatly told the Frankfurter Allgemeine Zeitung newspaper in late July, instantly triggering a new debate along familiar lines. Reiche argued that the pledges her government had made in the coalition contract earlier this year were just not going to be enough.
Germany’s aging population has long been recognized as a problem. The population’s median age — 46.7 — is the eighth-highest in the world and the third-highest among major economies, after Japan and Italy. By 2040, fully a quarter of the population is expected to be 67 or older. This year, birth rate fell to its lowest point in 20 years.
This has had a marked effect: In the early 1960s, there were still six actively insured workers for every pensioner — that ratio is now 2 to 1 and sinking, and in 2025, two-thirds of the Labor Ministry’s budget will go into the pension system: €121 billion ($140 billion).
“It cannot be sustainable in the long term for us to work only two-thirds of our adult lives and spend one-third in retirement,” said Reiche. “Unfortunately, too many people have been refusing to accept the demographic reality for too long.”
Economy Minister Katherina Reiche has suggested raising Germany’s retirement ageImage: Odd Andersen/AFP/Getty Images
Reiche’s statements triggered a quick backlash from her center-left Cabinet colleagues. Lars Klingbeil, finance minister and leader of the Social Democratic Party (SPD), which traditionally sees itself catering to a working-class electorate, described Reiche’s statement as a “slap in the face” for many workers.
“It’s easy to say that when you’re sitting in your comfortable chair in Berlin,” Klingbeil told news outlet ntv. “But you should go out and talk to the people in the country who are working as roofers, who are working as nurses, who are working as teachers and are really wearing themselves out and who are already struggling to make it to 67.”
Trade unions, meanwhile, said Reiche’s plan was simply a new way to cut pensions. Many workers will be unable to work to a higher age for health reasons, forcing them to retire early, and accept deductions that permanently reduce their pensions.
Raising retirement age doesn’t rule out pension cuts
The contract agreed by Germany’s two governing parties — Reiche’s conservative Christian Democratic Union (CDU) and the SPD — promised that Germany’s current retirement age would not be raised.
Instead, the contract pledged, “We want more flexibility in the transition from job to pension.” In practice, “flexibility” means offering incentives to people who work beyond the legal retirement age. This would include measures like the so-called “Aktivrente” (“active pension”), by which any income of up to €2,000 per month is tax-free for those above the legal retirement age.
Jan Scharpenberg, pensions expert at the financial advice company Finanztip, is convinced that the German pension system urgently needs to be reformed, but that the debate around it has become tedious.
“The length of a working life is just one of the levers that can be adjusted to reform the German pension system in order to deal with the demographic transformation,” he told DW. “And if I’m being really honest, I think it’s a bit exhausting how for years and decades the same pro- and con arguments are being made, but no actual reform is put in place.”
While he agrees that raising the legal retirement age may become necessary, that doesn’t negate the argument that it would, in practical terms, mean pension cuts for some people. “Those two things can be true at the same time, but that shouldn’t prevent a pension reform,” he said. “A reform of the system will only work if you combine and pull several levers.”
How Germany’s pension system works
The retirement age system in Germany is dauntingly complicated. At the moment, the legal retirement age in Germany is 65, though it is scheduled to rise to 67 by 2031. But the age is staggered depending on the individual’s year of birth, and how long they have paid into the system.
And there are exceptions: People who are disabled or have paid into the system for 45 years, for example, can retire earlier.
A contribution of 18.6% of an employee’s gross monthly salary goes into the state retirement fund, with the employee and the employer each paying half. The government expects this contribution rate to rise to 22.3% by 2035, where it is supposed to level out until 2045.
Johannes Geyer, public economics researcher at the German Institute for Economic Research (DIW), pointed out that the reason why the retirement age issue is so contentious is because it affects workers differently.
“There are lot of people who can’t imagine working beyond the age of 67,” he said. “But those in perhaps better paid jobs can do that.”
For this elderly German shopkeeper, retirement not an option
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Pension income vs. pension expenses
But many experts say the narrow focus on the retirement age is unhelpful, as there are many different ways of increasing contributions to the pension system.
One measure, for example, would be to provide better child care facilities, so that more single parents are able to work full-time and therefore pay higher pension contributions. Another solution might be to make migrating to Germany to work easier and more attractive. There are also proposals to increase the number of people paying into the public system by including the self-employed and civil servants, a proposal made recently by Labor Minister Bärbel Bas from the SPD.
Meanwhile, on the expense side of the ledger, some more painful measures might be put in place to balance the books. Apart from raising the retirement age, that might mean extending the “waiting time” (the number of years one must pay into the system before one can begin to draw a pension), or reducing the rate at which pensions increase every year.
The pension increase is calculated based on the development of gross wages and salaries in Germany and is 3.74% for 2025.
In the coalition agreement, the SPD was able to secure the pension level at 48% of the standard pension to the average income (before taxes) until 2031. Critics have labeled this as untenable.
According to Scharpenberg, a mix of measures needs to be implemented. But instead, he said, the perennial political debate revolves around doing one measure or another, as if it were impossible to combine them.
International comparison
The German pension system is structured very differently to other European countries. In Denmark, for example, the retirement age is linked to the country’s life expectancy, so that it rises automatically as people live longer.
And in Sweden, an individual’s contributions are invested in various financial markets and then the profits are paid out when that person reaches old age.
“That helps to diversify the risk,” said Geyer. “They’re not so dependent on the aging of their own population.” In the German system, on the other hand, contributions from workers are put into a single pot, which is used to finance current pensions.
Geyer argues that, unlike other European countries, Germany has failed to develop private insurance options to complement state pensions so that they help the whole population, rather than just the rich.
“Other countries have done that significantly better,” he said. “The UK, the Netherlands, Denmark, Sweden — they all have systems of obligatory insurance with relatively low costs and good profits. That’s missing here.”
Edited by: Rina Goldenberg
