Editor in chief at IamExpat Media
After months of protracted negotiations, the federal cabinet has finally approved a draft law to reform the German pension system by introducing a “basic pension” (Grundrente). The new supplement is expected to be paid out from 2021, at a cost of 1,3 billion euros per year. Here’s everything you need to know.
The idea behind the basic pension is this: If you have worked in Germany for a long time and consistently contributed to social security, you should get a pension that is higher than the basic subsistence benefit (unemployment benefit II). As it currently stands, this is not always the case.
Under the German pension system, a person collects so-called “pension points” throughout their working life; the more you work, and the more you earn, the more points you collect. Over time, this can mean that those earning low salaries or working part-time hours collect very few pension points and therefore receive insubstantial pensions.
The draft proposal, therefore, provides for smaller pensions to be “topped up” to meet a minimum requirement. It should help those currently receiving a small pension and reduce the risk of old-age poverty.
According to the draft law, someone needs to have contributed towards a German pension for at least 33 years in order to qualify for a basic pension. This includes not only periods spent working but also time taken out for child-rearing and care. The full supplement is only paid to those who have contributed for 35 years.
The second requirement is that basic pension recipients must have earned at least 30 percent of the average salary to qualify. Long-term mini-jobbers, therefore, will not receive the basic pension.
Finally, basic pensioners must prove that they have no other substantial income, such as company pensions or a partner’s pension. Expenses for healthcare and long-term care insurance will be deducted. The allowance for singles is a taxable income of 1.250 euros; for couples, it is 1.950 euros. Those who earn more than this will have their basic pension reduced.
If someone qualifies for the basic pension, their accumulated pension points will be upgraded by a complicated calculation, up to a maximum value of 80 percent of the average pension benefit. If your pension is significantly below this average value, your benefits could even be doubled, while those receiving sums closer to the average will only receive a small supplement.
You do not need to apply for a basic pension. Data will be checked automatically and the supplement given to those who qualify for it. The umbrella company responsible for Germany’s state pension system, Deutsche Rentenversicherung, will take on hundreds of new employees to keep on top of the paperwork.
The basic pension is due to be introduced on January 1, 2021 - although it still needs approval from the Bundestag and the Bundesrat. 1,3 million people are expected to benefit from it, 70 percent of whom are women. It is expected to cost a total of 1,3 billion euros in its first year, rising to 1,61 billion by 2025.