Contributions to pensions increase for millions, exceeding initial estimates
The German government has proposed a significant overhaul of its pension system, with plans to increase the pension contribution rate and introduce improvements to mother's pensions.
According to the draft for the new pension law, the contribution rate will rise from the current 18.6% to 18.8% of gross wages, starting in 2027. This increase, which is more substantial than previously planned, will be shared equally between employees and employers, with each contributing 9.4% of the total.
The aim of this increase is to create a larger financial cushion for the stability of the pension fund, known as the minimum reserve. The reserve is set to increase from 20% to 30% of a monthly expenditure in the pension fund. However, it's important to note that the federal government will not have to cover the filling of this reserve.
One of the key elements of the proposed reforms is an increase in the "mother’s pension" (Mütterrente), which will raise benefits by approximately €20 per child per month for parents who had children before 1992. This reform is expected to cost around €5 billion annually and is scheduled for implementation on January 1, 2027.
Additional reforms include expanding occupational pension participation through the Second Occupational Pensions Strengthening Act, currently under consultation. This act aims to encourage more widespread voluntary company pensions while addressing employer pension supplements legally.
These reforms will have an impact on both employees and employers. Employees will face a slight increase in their pension contribution rate, reducing their take-home pay marginally. However, the guaranteed pension benefits will remain at a minimum of 48% of net income, protecting retirement income levels.
Employers will share the increased contribution burden equally with employees, raising their social security costs. However, the legislation includes clarifications from the Federal Labor Court that allow some flexibility regarding employer pension supplements depending on collective agreements made before 2018.
These reforms aim to stabilize the pension system financially, maintain retirement income, and enhance benefits for older parents. However, they will moderately increase ongoing costs for both employees and employers. The Bundestag is expected to pass the draft by the end of the year.
[1] Source: Bundesregierung (German Federal Government) [2] Source: Bundesministerium für Arbeit und Soziales (Federal Ministry of Labour and Social Affairs) [3] Source: Bundesministerium der Finanzen (Federal Ministry of Finance) [4] Source: Bundesministerium für Familien, Senioren, Frauen und Jugend (Federal Ministry for Family Affairs, Senior Citizens, Women and Youth)
- The proposed pension reforms in Germany, which include an increase in the pension contribution rate and improvements to mother's pensions, are expected to impact both employees and employers, as they will modify the existing financial structure of business and politics, and could potentially influence the general-news discourse about social welfare and economic stability.
- The German government's decision to enhance mother's pensions by €20 per child per month for parents who had children before 1992, a reform expected to cost around €5 billion annually, could signal a shift in the country's family and social policies, demonstrating a closer link between politics and finance in addressing general-news issues such as families' welfare and societal support structures.
