Employer Action Code: Monitor
Germany’s federal government has endorsed the 33 recommendations for reforming the national pension system that were recently made by a government-appointed commission. The recommendations aim to ensure that the social security pension system will be financially sustainable and provide adequate retirement benefits (defined as a net income replacement rate of at least 70%) and to encourage the establishment of employer-provided retirement plans. The social security pension system is under significant financial strain, with around one-quarter of the federal budget financing the system’s annual deficit; this situation is expected to worsen in the absence of reforms, given the projected continued aging of the population.
Key details
The main elements of the recommendations include:
- Establishing a new funded retirement plan within the state pension system, based on individual pension accounts. The new plan would be financed by employer and employee contributions of 1% (each) on covered earnings, with funds invested in the capital markets. Employees who retire as of 2032 and won’t have had enough time to participate in the new funded pension plans to accrue sufficient benefits would be compensated by applying a transition factor to their state retirement benefit calculation
- Encouraging the provision of voluntary occupational pensions, ideally covering most of the workforce in the future. This would be achieved by negotiations with social partners; simplifying bureaucracy around occupational pensions; improving the portability and legal certainty of occupational pension plans; and making participation more attractive, especially for lower-income employees
- Linking social security normal retirement age (NRA) to life expectancy starting in 2031, with NRA adjusted in such a way that the expected average working life would be twice as long as the expected retirement period. Under this principle, the Federal Statistics Office projects that NRA would rise by six months (from age 67 to age 67 and a half) between 2031 and 2041
- Abolishing the option, for employees with working careers of 45 or more years, to retire before NRA with full retirement benefits. Currently, employees with at least 45 years of coverage can retire, with no reduction to their pension, between ages 63 and 65 if they were born between 1953 and 1963, and at age 65 if born in 1964 or later
- Increasing early retirement age for working careers of 35 years or more from age 63 to age 64, linked to changes in NRA thereafter
- Increasing partial retirement age from age 55 to age 58, also linked to changes in NRA thereafter
Employer implications
The government intends to pass legislation enacting the recommendations by the end of 2026. This is an ambitious goal considering the raft of recent reform packages announced, such as for health insurance, income tax and labor law. Employers should monitor the development of the expected legislation on pensions as well as other reforms.
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