Adjusting pension levels negatively impacts public financial resources and burdening the financial contributions made by the public.
In a move aimed at securing the financial future of retirees, the German government has decided to fix the pension level at 48% of average wages until 2031. This decision, while providing stability for pensioners, comes with several significant impacts on taxation, public deficits, and contribution rates across different age groups.
The current pension contribution rate is stable at 18.6% for the years 2024-2026. However, forecasts predict a slight increase by 0.2 percentage points in 2027, and without the legal fix, contribution rates could rise to 21.4% by 2040, with a corresponding decrease in the pension level to 45%. This means that maintaining the pension level at 48% will require moderate increases in contribution rates in the medium term.
The decision to fix the pension level has also resulted in a slight deficit in pension insurance, with the sustainability reserve—used to stabilise contributions—expected to fall from 1.57 months of expenditures at the end of 2024 to 1.3 months by the end of 2025, further declining in 2026.
The implications of this policy extend beyond the pension system. While the sources do not detail exact tax changes, maintaining a high pension level fixed at 48%—despite demographic pressures—generally implies increased fiscal strain on the government. This can translate into higher public expenditure and pressure on public budgets, possibly leading to higher taxation or borrowing to cover deficits if contribution increases are limited or insufficient.
The policy affects different age groups differently. Younger generations may face higher contribution rates as the working population shrinks relative to retirees. Older workers and pensioners benefit by having stable pension income at 48% of average wages without cuts. The slight increase in contribution rates in upcoming years mainly affects current workers and employers.
Despite the fixed pension level, pensions will continue to be adjusted in line with wage developments, meaning pension benefits should keep pace with general wage growth, protecting pensioners’ purchasing power.
As the debate continues, economists like Martin Werding call for additional reforms to prevent the policy from becoming more expensive than expected. He suggests simplifying and portability for savings models like the Riester pension, an "opt-out principle" in pension assignments, and correcting the sustainability factor to give younger contributors more financial leeway.
Critics, such as Susanne Wooders, head of Fidelity's Germany business, have expressed concern over the lack of pension reforms in politics due to demographic changes. They urge Berlin to show more courage in implementing changes to avoid potential financial strain for younger contributors.
In conclusion, while the decision to fix the pension level at 48% in Germany helps stabilise pension income for retirees, it requires moderate increases in contribution rates, a drawdown of pension reserves, and likely increased fiscal pressure that could impact taxation and public deficits. Maintaining this level long term will depend on demographic and economic developments as well as political decisions on financing.
The decision to fix the pension level at 48% implies a need for moderated increase in contribution rates in the medium term, which can result in higher public expenditure and pressure on public budgets, leading to potential increases in taxation or borrowing.
This policy, expected to reduce the sustainability reserve for pension insurance and affect different age groups differently, necessitates additional reforms like simplifying savings models, implementing an "opt-out principle" in pension assignments, and correcting the sustainability factor to ensure financial leeway for younger contributors.
