Is Germany's pension system still secure?

Pensions have been a hot-button issue in Germany for many years, but this week, Chancellor Friedrich Merz himself reignited the controversy.

"Statutory pension insurance alone will, at best, still provide only basic coverage for old age. It will no longer be sufficient to secure one's standard of living in the long term," Merz said at an event hosted by the Association of German Banks in Berlin.

For that reason, additional funded elements of workplace and private retirement savings are necessary, the chancellor said: "And to a far greater extent than we currently have, which is largely based on voluntary participation."

This would amount to placing greater emphasis on stocks and other forms of investment in the future, which would be a controversial strategy, because the stock market is subject to major price fluctuations. Today's gains can be tomorrow's losses — and vice versa.

Pension commission to develop proposed solutions

Labor Minister Bärbel Bas, of the Social Democratic Party (SPD) — junior coalition partner to Merz's conservative Christian Democratic Union (CDU) — sharply criticized the chancellor's remarks. She said Merz had "given the impression that people should now secure themselves privately." Many people, she argued, had interpreted Merz's comments to mean that they would "no longer even receive a decent pension."

The pension dispute between the CDU and the Social Democrats may be a foretaste of what could soon cause emotions to run even higher. This is because a pension commission appointed by the coalition is set to present its recommendations by the end of June.

Berlin under pressure to fix pensions, health care and taxes

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Consequences of an aging society

Key starting points for all models aimed at securing pensions for the future are demographic trends on the one hand and life expectancy on the other. Low birth rates have serious financial consequences in Germany, as in many other countries: Fewer working people are paying contributions to the state pension system, while the number of retirees is rising.

The Organization for Economic Cooperation and Development (OECD) analyzed the pension systems of its 38 member states in the study "Pensions at a Glance." Its key finding: Policy strategies vary widely and are difficult to compare.

Net pensions in Germany are below average

If one looks exclusively at the pension amount relative to total income after deducting taxes and social security contributions, Germany ranks in the middle of the pack at 53% — well below the OECD average of 61%. Other populous European countries such as France and Italy reach figures between 70% and just under 80%.

But there are even greater deviations both downward and upward. In Estonia, Lithuania, and Ireland, the state pension level is in some cases below 40%. It is more than twice as high — at over 90% — in the Netherlands, Portugal, and Turkey.

Retirement at 67 already a reality in the US and Japan

According to the OECD, the age at which people actually end their working lives plays an important role in pension financing. In Germany, people currently retire at an average age of just over 64, nearly three years earlier than the statutory retirement age for people born in 1964 or later. Those who retire earlier generally receive a smaller pension.

In some countries, people are already required to work until age 67. Among them are the United States and Japan, the world's first and fourth largest economies.

From the OECD's perspective, it generally makes sense to link the start of retirement to rising life expectancy and thus push it back in many countries.

Higher pension contributions in France and Italy

The level of contributions to the statutory pension varies greatly internationally. According to OECD data, it is around 30% of income in France and as high as 33% in Italy. At 18.6%, Germany is significantly below this average. The contribution is split equally between the employee and the employer.

One issue that is increasingly coming into focus is poverty in old age. In Germany, the risk is particularly high for those who earned little during their working lives and were barely able to set aside money for private retirement savings. In Denmark, policymakers are attempting to counter this with a tax-funded basic pension.

East Germans more affected by poverty in old age

A unique German situation is the differences between East and West. People who lived and worked in communist East Germany have, relative to their years of work, received significantly lower pensions for a long time. The slow alignment with Western levels was not completed until 2025 — 35 years after reunification.

Poverty in old age therefore potentially affects East Germans more frequently. Another reason: Due to the state-planned economy in the GDR, they had no opportunity to invest in pension funds, for example. After all, unlike in capitalism, there were no stock markets under communism.

This article was originally written in German.