After months of disputes within the coalition government led by social democrat Olaf Scholz, the German Council of Ministers finally approved this Wednesday the new pension law to ensure that pensions continue to increase in line with salaries. The rule also creates a capitalization fund that will contribute to paying pensions in the future. “Anyone who works and contributes must also be able to count on the state pension tomorrow. That is a central promise of our welfare state,” German Labor Minister Hubertus Heil declared after the Executive meeting.
For the social democratic politician, it is about “offering security in old age for those who are retired today,” but it also “concerns those who work today and those who will work in the future.” Likewise, he pointed out that without the so-called Pension Package II, pensions would gradually decrease from 2025 and would be decoupled from the evolution of salaries. To avoid this drop in perceptions in relation to salaries, the German Executive established that the so-called pension level remain stable at 48% of the average German salary in the coming years until 2039. Without this measure, it would fall below the 45% in the long term, according to projections. By stabilizing the level at 48%, a pension in 2040 of, for example, 1,500 euros will be almost 100 euros higher per month. That is, 6% more.
Previous governments had recognized the demographic change that Germany has been suffering for years in a pension formula that slowed the increase in spending and distributed the burden between payers and recipients. That is, if there are fewer workers, they have to pay higher contributions and pensioners give up part of their pensions. However, the Social Democrats wanted to avoid a further decline in pensions at all costs.
The main variable used to adapt the pension formula in Germany is what is known as the pension level, which essentially describes the average pension compared to the average salary of the population, calculated each year by the Office Federal Statistics. In 2023 this stood at 4,479 gross euros per month. But the indicator does not indicate the amount of the pension that a person receives, as many people mistakenly think, since it depends on many variables. It only serves as a reference for an average pensioner who has contributed to pension insurance for 45 years. From there, the Government uses this level to adapt its formula with which it calculates payments. Currently, this average pension after Social Security contributions amounts to 1,565.03 euros.
The new package approved this Wednesday will be expensive. A recent document from the Economic Research Institute (Ifo) estimates the additional costs for 2040 at 32 billion euros. In 2060, it will be 45 billion euros. Furthermore, Ifo criticized that the reform completely ignores the reality of Germany. “What is urgent is to adjust the retirement age to life expectancy. If the population ages, retirement must also occur later. Society and politicians have been hiding these facts for years,” the institute wrote in an analysis in which it also warned that there will be a lack of money for investments in roads, Education and Defense.
For now, to face the additional cost, the Government agreed that the pension insurance contribution will remain stable at 18.6% of the gross salary of each worker until 2027, but will increase from 2028 until it reaches 22.3%. % in 2035. The so-called generational capital will also be created, meaning that Germany will invest billions of state subsidies in the capital market as an additional source of income for the pension system. However, it is estimated that this measure will not take effect until 2036. The pension fund estimates that by then it will be able to generate around 1% of its necessary income from the stock fund (an average of 10 billion euros annually).
For the leader of the Liberal Party and Minister of Finance, Christian Lindner, the fund represents a “turning point in German pension policy”, since for the first time a capitalization pillar will be established in the legal retirement regime. Likewise, the minister indicated that the new pension package will be followed by others in the future.
The reform was a central social policy project of the government coalition formed between social democrats, liberals and greens. The Social Democrats needed to push it forward to make their electoral promise of stable pensions in Germany a reality. As a condition, the liberals imposed the creation of the capital fund. However, Lindner also used this reform as a bargaining chip in his dispute over the strict General Budgets that he wants to carry out for next year, for which he needs the different ministries to stick to their savings plans.
Social organizations and unions have praised Pension Package II, but demand more. Verena Bentele, director of the VdK social organization, told the German newspaper Rheinische Post that an income level of 53% would mean an increase in pensions of 10% “and would really help to combat poverty in old age.” This is one of the main problems of the European country and worries 67% of the population, according to a recent survey published by the German network NDR.
Follow all the information Economy and Business in Facebook and xor in our weekly newsletter
Subscribe to continue reading
Read without limits
_
#Germany #approves #pension #package #address #aging #population