Why Germany’s pensions problems will soon be your problem

Finance Minister Lars Klingbeil presented his budget for 2026 this week. And now that the debt
brake has been taken very firmly off, he’s splashing the cash.

So much so that it’s easy to lose track of where the money is coming from – and where it’s going: billions for the Bundeswehr here, billions for Deutsche Bahn there; even the consolation prizes for out-of-fashion green initiatives have nine-figure price-tags…

But the real story here is not the €126 billion in off-plan spending on defence, infrastructure, and net
zero. It’s the near-identical sum which will be spent on pensions: €127,8 billion. That’s almost a quarter of the regular budget, which stands at €520 billion.

And given the lower-than-projected tax take in year six of economic stagnation, this level of spending will require a record €170 billion of government debt.

So yes, we are, in essence, topping up the pension fund on credit.

How the German pensions system works

If you are employed in Germany, you make monthly contributions of 9.3 percent of your salary to an arms-length body, Rentenversicherung, which is matched one-to-one by your employer.

Similarly to systems such National Insurance in the UK, the idea is for those in the workforce to finance pensions while they themselves acquire entitlements for their own retirement.

So in theory, the government shouldn’t need to allocate any budget to the system at all. Yet in practice – in another similarity to the UK’s National Insurance – the system stopped working a long time ago and now requires annual injections of cash from the state exchequer to stay afloat.

Unfavourable demographics

The principal cause is that Germany now has far more retirees living much longer set against a rapidly-declining working population.

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When the current pensions architecture was put in place in the 1950s, there were around six people in work for every one person claiming a pension. Average life expectancy was still below 70, and as Chancellor Adenauer famously remarked: “Kinder kriegen die Leute immer” (People always have kids).

It didn’t turn out that way. Instead, as life expectancy heads past 80, there are now only three
workers for every pensioner; soon, this ratio will be closer to two to one.

READ ALSO: ‘Multiple crises’ – Why fewer babies are being born in Germany

While Germany is not alone here, our 1950-1970 boomers proved both particularly numerous and particularly shy of having children, so we have worse statistics than neighbouring countries – and more trouble paying pensions.

Poor design

Moreover, Germany’s pensions system is, by design, more expensive than most other variants:
instead of setting a minimum number of years’ contributions as a threshold for a basic entitlement
(as in UK, Denmark, or Sweden, for example), our system awards earnings-based points throughout
working lives and then sets an individual pension level accordingly.

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Check your annual statement to find out your projected monthly sum, and you’ll see that this is good for high-earners and bad for the low-paid. What is more, it makes life difficult for actuaries at the pensions body, who have no idea how contributions from those still in work will develop.

Germany has plenty to offer retirees. Image by Rudy and Peter Skitterians from Pixabay

If the current labour force earns less, workers pay in less, too. Yet life expectancy rises inexorably (especially for high earners, who tend to be healthier in old age), and so the government has to step in to satisfy pensioners’ legal entitlements.

Bad politics

Worse, government has continually tweaked the system in ways which make it ever costlier.

In the late 2010s, for example, Merkel’s coalitions expanded early retirement programmes, enticing anyone with 45 years’ employment history to leave the workforce at 63 rather than 68, cutting five years of potential contributions out of the system – and adding five years of pay-outs.

They also introduced the basic minimum state pension (Grundrente) and an additional mothers’ allowance (Mütterrente) – over and above the points-based calculation.

READ ALSO: Tax cuts and pensions – How Germany’s budget changes could impact you

The justification for this was that people who don’t earn well or leave work to look after their families accrue fewer points, and so are left with low pensions.

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Some say it’s only fair that everyone has a decent income in old age, regardless of what they contributed. Others say: hard cheese, that’s how it works.

Wherever you stand on the politics, though, one thing is clear: the system was not designed to simultaneously reward high earners and be generous to all.

Why the German pension systems won’t stop working – for pensioners

Yet that is precisely what, out of political expediency, it is being bent to do. The result is an already
huge demographic deficit being made worse, swallowing up ever larger amounts of government
spending.

And it’s about to get worse: a new, expanded Mütterrente is being planned as part of a bill
guaranteeing that pay-outs will average 48 percent of wages for the remainder of this parliament.

All workers in Germany contribute to the country’s pension system. Photo: picture alliance/dpa | Axel Heimken

Yet there will be no reduction in entitlements for higher earners, so the money will have to come from…

That’s right, future budgets! By 2027/2028, we can expect subsidies to the system to be
approaching one third of regular spending. This means that, once the €500-billion off-plan bonanza
ends in 2029/2030, there’ll be direct competition for resources between the Army and the army of
pensioners. Whoever the Finance Minister is by then, they’ll be weighing up whether to spend on
upgrading railways or uprating pensions.

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What is already obvious: they’ll opt for the latter.

As everybody knows, turkeys don’t vote for Christmas – and any politician looking to please turkeys doesn’t put them on the menu.

As pensioners make up an ever-growing proportion of the electorate, no major party will campaign to
make them even marginally worse-off. Recent policy initiatives from well-meaning economists – e.g.
a “Boomer-Soli” whereby wealthier pensioners pay a tax surcharge to finance the system, or doing it
like the Danes and coupling pension age to life-expectancy – are total non-starters.

As is the idea of getting civil servants and state functionaries to pay contributions. (Yes: Beamte get off scot-free…)

How will the pension challenge affect today’s workers?

Instead, the ever-growing pensions bill will have to be financed by penny-pinching elsewhere – and
by increasing insurance contributions for those currently in the workforce.

So expect taxes to stay high, public infrastructure to get worse, and that 9.3 percent on your pay-packet to turn double-digit before the decade’s out.

READ ALSO: ‘€10 a month’ – Germany to set up pension accounts for all children from age 6

Of course, no-one is going to say that out loud, which is why this thorny issue has been delegated to a commission which will report on the matter in the coming… *Yawn*.

As anyone who has worked in a German company knows: Wenn man nicht weiter weiß, bildet man einen Arbeitskreis! (If you don’t know the answer, set up a committee!)

So if you’re in work in Germany, there are two ways of looking at:

Pessimistically, you’re being sucked dry by a Ponzi scheme which will have collapsed by the time you’re of pension age. Or, optimistically, politicians’ consistent refusals to change anything mean that, when you hit retirement age, you’ll be having the cash splashed on you – and may see the whole issue quite differently.

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One thing’s for sure: if Germany retains its system in anything like the present form, it will remain generous by comparison to many other countries – who will also be facing demographic pressures to
varying degrees and seeking to keep spending under control.

And a country without any pension provision at all is almost inconceivable. Indeed, as one of German politics’ most enduring soundbites has it: “Die Rente ist sicherI” (Your pension is safe).