How is Germany planning to reform its ailing pension system?

With the overstretched German pension system teetering on the brink of collapse, the prospect of a major reform is now firmly back on the government’s agenda. Here’s an overview of the trouble the pension system is in, and how the German government is proposing to solve it. 

German pension system in dire need of reform

Reforming the German pension system is likely to be one of the most complex issues the federal government has to face. Not only is the system already in dire financial straits, but it is also a divisive topic that threatens to become a wedge issue for the government, which is already bickering over reform proposals. 

Everyone agrees on one thing, though: the German pension insurance needs to be reformed. Until the 1990s, it worked as a self-financing system because there were relatively few pensioners compared to many contributors. In 2025, that ratio has entirely reversed, and there are no longer enough people working to fund the pension benefits of those who have already retired. 

While in 1992 there were 2,7 contributors for every pensioner, there are now fewer than two. By 2050, it is expected that there will be 1,3 contributors for every pensioner, ntv reports. At the same time, the average retirement duration has increased. In 2023, the average man drew a pension for 18,8 years, compared to 13,6 years in 1998. For women, it has increased from 18,4 to 22,1 years. 

This makes the very expensive pension system - which is already the biggest item on the bill for the government’s 2026 budget - unaffordable in the long term. In 2024, the system was already costing 408 billion euros per year, an increase of 60 percent compared to 2010. 

What reform proposals are on the table?

The federal cabinet is therefore meeting this week to iron out several proposals to reform the German pension system, with a view to begin implementing some of these reforms in the autumn after the summer break is over. 

Here is an overview of what has been proposed and what it might mean for you.

Extending the pension “holding line”

As it currently stands, the German pension insurance guarantees a retirement benefit of 48 percent of the recipient’s net income during their working life. This 48 percent threshold, known as the “holding line” (Haltelinie), is enshrined in law up to 2025.

It is now being called into question, with some calling for the threshold to be reduced, but despite some criticisms the federal government seems to be set on extending this guarantee until 2030. 

Raising pension contributions

If the 48 percent threshold is maintained, it seems conceivable that pension contributions might be increased to finance the system in the medium-term. Currently, pension contributions stand at 18,6 percent of a person’s income up to a certain threshold, with both the employee and the employer each paying half. 

Current projections, according to Deutschlandfunk, put the contribution rate as stable until 2027, before rising to 20 percent from 2028 onwards and 22,3 percent in 2035. It is likely that these contribution rates will be re-evaluated as part of the reform. 

Increasing the mother’s pension

Another change that seems almost certain to pass is the planned rise in the pension subsidy for older parents, known colloquially in Germany as the mother’s pension (Mütterrente). 

The reform would essentially increase pension benefits for people who had children before 1992, by around 20 euros per month per child. It is designed to compensate parents (mostly mothers) who took time off to raise their children and paid less into the social security system. 

It looks set to be implemented on January 1, 2027, at a cost of around 5 billion euros per year.  

Encouraging people to work past retirement age

The CDU, CSU and SPD also want to make it more attractive for older people to continue working past retirement, and therefore to continue contributing to the pension system. Their plan - known as the “active pension” (Aktivrente) - is to incentivise this type of work with tax benefits. 

Under the proposal, a pensioner would be able to earn up to 2.000 euros per month and not pay any income taxes on it. However, the details of the proposal still need to be ironed out - for instance how it would be financed. 

Incentivising retirement savings

Another proposal is to introduce schemes that would encourage people to diversify their retirement savings. For instance, the “early-start pension” (Frühstartrente) would incentivise young people to start putting money into a private pension. The government would contribute 10 euros per month for each child between the ages of six and 18 in full-time education, with the money invested in a savings account. 

According to the Süddeutsche Zeitung, Labour Minister Bärbel Bas also wants to increase the number of people contributing to a company pension (currently, only around one in two employees do so). She would make it easier for smaller companies to offer occupational pensions and simplify opt-out systems, meaning that most people would automatically contribute unless they objected, rather than the other way around. 

Increasing the pension age

A more controversial proposal is the one to increase the retirement age. The pension age is already rising in Germany, from 65 to 67 by 2029. The argument is, however, that even this higher retirement age is out of step with increased life expectancies. Some, including Federal Economics Minister Katherina Reiche, and the Ifo Institute, are calling for it to be linked to life expectancy trends. 

“Demographic change and ever-increasing life expectancy make it unavoidable: the lifetime labour period must increase,” Reiche told the FAZ last month. “We have got to work more and longer.”

However, Chancellor Merz and other ministers were quick to dismiss the proposal and reassure outraged voters that they had no plans to raise the retirement age. Bas described it as a “backdoor pension cut”. 

Adding self-employed people and civil servants to the pension insurance system

One alternative would be to add self-employed people and civil servants to the pension insurance system to help generate more revenue. Currently, these groups of people are generally excluded. 

However, for others this raised constitutional questions - as major legislative change would be needed to implement such a reform - as well as doubts about the financial benefits, as the administrative effort to achieve it would increase spending in the medium term. 

Introducing a “boomer solidarity tax”

Finally, the most “out there” proposal comes from the German Institute of Economic Research (DIW), which has called for a “boomer solidarity tax” to be levied on all retirement income. This would affect any retiree whose monthly income exceeds the tax-free allowance of 902 euros, and proceeds would be used to support lower-earning pensioners. 

When will a reform be introduced?

At the moment, all of these proposals are just that: proposals. They will be discussed by the federal cabinet this week, and nothing will be passed until after the summer break. The active pension and early start pension are expected to be the first schemes to get the green light. 

A more fundamental reform will take more time. The government plans to establish a commission, which will get started after the summer break and present its plans sometime in 2027.