Are pension contributions about to increase in Germany?

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The finances of pension funds in Germany are under strain. But while the coalition parties rule out a cut in pensions or an increase in the legal retirement age, some experts see only one solution: increase contribution rates.

Coronavirus crisis puts pressure on German pension system

The German pension system is facing a crisis: not only does demographic change mean that there are fewer and fewer employees to finance the benefits of a growing number of retirees, but the coronavirus pandemic is also having an impact.

With millions of workers forced to Kurzarbeit and therefore receiving lower salaries in 2020, pension funds have seen their contributions drop significantly. However, Germany’s “pension guarantee” prohibits a corresponding reduction in pension benefits – which creates a huge gap between contribution income and monthly payments to some 18.4 million retirees in Germany.

The gap is especially large because July 2020 saw higher-than-usual pension increases of 3.45% in the western federal states and 4.20% in the east. German pensions are always calculated based on the evolution of wages from the previous year, and in 2019 the economy was booming.

When average wages fell in 2020, the pension guarantee ensured that pension benefits didn’t go down – they just stayed static. But as wages are expected to rise significantly again as soon as the economy recovers, pensions will also rise again – creating an even wider gap.

The government could be forced to increase the contribution rate

In preliminary discussions, the so-called “traffic light coalition” – which is expected to form the next German government – ruled out reducing pension benefits or raising the statutory retirement age. This leaves only a few choices to cover the financial deficit.

According to Frank Weneke, boss of ver.di, Germany’s second largest union, pension contributions will almost certainly increase over the next few years. He told the Rhine Post that employees in Germany would probably agree to contribute around 30 euros extra per month to ensure that they receive an adequate pension after retirement.

The current contribution rate is 18.6 percent of a person’s salary, split equally between employers and employees. The previous federal government had suggested that the rate would rise to 20 percent by 2026. However, according to a new report from the Institute for German Economics (IW), further increases of 0.3 to 0.4 percentage point percentage might even be necessary. , creating a total rate of about 20.4 percent.

The IW is also certain that the federal government will soon have to increase its subsidy to pension insurance – which is financed by taxation and already amounts to some 100 billion euros per year.

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