Could pension contributions be about to rise in Germany?

The finances of pension funds in Germany are being stretched thin. But with the coalition parties ruling out pension cuts or an increase in the statutory retirement age, some experts see only one solution: raising contribution rates. 

Coronavirus crisis puts pressure on German pension system

Germany’s pension system is facing a crisis: not only does demographic change mean there are fewer and fewer employees to finance the benefits of a growing number of retirees, but the coronavirus pandemic is also having an impact. 

With millions of workers forced onto Kurzarbeit and therefore receiving lower salaries in 2020, pension funds saw their contributions fall significantly. However, Germany’s “pension guarantee” prohibits a corresponding cut in pension benefits - making for a massive gap between the contribution income and the monthly payments to the approximately 18,4 million pensioners in Germany. 

The gap is particularly large because July 2020 saw higher than usual pension increases of 3,45 percent in the western federal states and 4,20 percent in the east. German pensions are always calculated according to the development of wages the year before, and in 2019 the economy was booming. 

When average wages fell in 2020, the pension guarantee ensured that pension benefits did not fall - they only remained static. But with wages expected to rise significantly again as soon as the economy recovers, pensions will also rise once again - creating an even bigger gap. 

Government may be forced to raise contribution rate

In preliminary talks, the so-called “traffic light coalition” - which is likely to form Germany’s next government - has ruled out slashing pension benefits or raising the statutory retirement age. That leaves only a few choices to cover the financial shortfall. 

According to Frank Weneke, boss of ver.di, the second-biggest union in Germany, pension contributions are almost certain to rise within the next few years. He told the Rheinische Post that employees in Germany would likely accept contributing around 30 euros extra a month to ensure they receive an adequate pension after retirement.  

The current contribution rate is 18,6 percent of a person’s salary, split equally between employers and employees. The previous federal government had suggested that the rate would rise to 20 percent by 2026. However, according to a new report from the Institute for German Economy (IW), further increases of 0,3 to 0,4 percentage points could even be necessary, creating a total rate somewhere around 20,4 percent. 

The IW is also certain that the federal government will soon have to increase its subsidy for pension insurance - which is financed via taxation and already amounts to some 100 billion euros per year.