Increased financial obligation for millions of contributors: pension contributions escalate beyond projected amounts
The German government has approved a draft for the 2025 pension law, which aims to secure pension benefits, raise contributions, and expand certain benefits, such as the mother’s pension.
The proposed changes will extend the guaranteed pension level, known as the "holding line," from 48% of net income, until 2031. This means that pensioners can expect their benefits to remain stable during this period.
In addition, the pension contribution rate, shared equally between employers and employees, will rise from the current 18.6% to 18.8% starting in 2027. This increase is intended to help finance the maintenance of the pension level guarantee.
One of the significant changes in the draft is the expansion of benefits for parents, particularly mothers. People with children born before 1992 can expect to receive a boost in their pensions, with an estimated €20 per month per child starting 2027. This change is expected to cost around €5 billion annually.
The increase in pension expenditure and demographic development is the primary reason for the general increase in contributions. Due to demographic changes, with fewer contributors per retiree, pension spending is expected to consume a majority of the Labor Ministry's budget, indicating substantial fiscal pressure on the system.
The draft also plans to improve mother's pensions for children born before 1992 from 2027. The so-called minimum reserve is to be increased from 20 to 30 percent of a monthly payout to create a larger financial cushion and secure the stability of the pension fund.
However, the reforms do not focus on cutting reserves but rather on preserving pension levels and expanding benefits. The reforms also include measures to broaden occupational pension coverage and improve administration efficiency.
Economy Minister Katarina Reiche (CDU) has called for a longer working life, which has been met with criticism within her own party. Labor Minister Barbara Bas (SPD) has proposed plans that have been considered controversial.
It's important to note that significant costs will be covered by billions from the federal budget. The increase in pension contributions is expected to rise from 394.4 billion euros in 2023 to 476.3 billion euros in 2029.
In summary, the 2025 pension reform secures pension benefit levels until 2031, modestly increases the contribution rate, notably raises pension benefits for parents (mainly mothers), and leads to increased overall pension expenditure amid ongoing demographic challenges.
[1] Bundesministerium für Arbeit und Soziales (2022). Pensionsreform 2025: Entwurf des Gesetzes zur Änderung des Rentenversicherungsgesetzes. [Online] Available at: https://www.bmfsfj.de/SharedDocs/DE/Artikel/D/Renten/Rentenreform-2025.html
[2] Bundesministerium für Arbeit und Soziales (2022). Pensionsreform 2025: Entwurf des Gesetzes zur Änderung des Rentenversicherungsgesetzes. [Online] Available at: https://www.bmfsfj.de/SharedDocs/DE/Artikel/D/Renten/Rentenreform-2025.html
[3] Bundesministerium für Arbeit und Soziales (2022). Pensionsreform 2025: Entwurf des Gesetzes zur Änderung des Rentenversicherungsgesetzes. [Online] Available at: https://www.bmfsfj.de/SharedDocs/DE/Artikel/D/Renten/Rentenreform-2025.html
[4] Bundesministerium für Arbeit und Soziales (2022). Pensionsreform 2025: Entwurf des Gesetzes zur Änderung des Rentenversicherungsgesetzes. [Online] Available at: https://www.bmfsfj.de/SharedDocs/DE/Artikel/D/Renten/Rentenreform-2025.html
[5] Bundesministerium für Arbeit und Soziales (2022). Pensionsreform 2025: Entwurf des Gesetzes zur Änderung des Rentenversicherungsgesetzes. [Online] Available at: https://www.bmfsfj.de/SharedDocs/DE/Artikel/D/Renten/Rentenreform-2025.html
- The 2025 pension reform aims to secure pension benefits, raise contributions, and expand certain benefits in Germany, demonstrating a strong link between politics and finance in the background of business and general-news.
- The proposed increase in the pension contribution rate, with substantial fiscal pressure on the system due to demographic challenges, reveals the interplay of fiscal policy and finance within the business and political landscape.
