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Example calculation: This is what the traffic light pension reform brings

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Example calculation: This is what the traffic light pension reform brings

Federal Finance Minister Christian Lindner (left, FDP) and Federal Minister for Labor and Social Affairs, Hubertus Heil (SPD), at the announcement of the planned pension package II. picture alliance/dpa | Michael Kappeler

The federal government is planning a pension reform to stabilize pension levels and reduce pension contributions. The federal government wants to invest billions in the capital market and pay subsidies to pension insurance from the mid-2030s. Without the reform, pension levels would be decoupled from wage developments from 2027 onwards, which could lead to relative impoverishment of pensioners.

Millions of baby boomers are retiring, but the government promises that pensions will not be cut. In order to secure the pension level of 48 percent in the future, the federal government is planning a reform package that is intended to slow the expected increase in pension contributions. Labor Minister Hubertus Heil (SPD) and Finance Minister Christian Lindner (FDP) presented a concept on Tuesday. The federal government should invest billions in the capital market, which will pay subsidies to pension insurance from the mid-2030s.

Chancellor Olaf Scholz emphasized that pension cuts were not an option for him. In a video message, the SPD politician criticized proposals to raise the retirement age to 70 and calls for pension zero rounds. Labor Minister Heil also assured that there would be no pension cuts and that no further increase in the retirement age was planned. The reform package is expected to be passed by the Bundestag before the parliamentary summer break in July.

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Guaranteed pension level through pension package I

Labor Minister Heil emphasized that everyone must be able to rely on the statutory pension. Without the reform, pension levels would be decoupled from wage developments from 2027, which would mean that pensioners would become poorer compared to the working population. This should be prevented by securing the pension level. The pension security level is currently set at around 48.2 percent until 2025. However, a decline to 45 percent is forecast by 2037 as millions of baby boomers from the 1950s and 1960s retire.

The pension level indicates what percentage of the current average wage someone who has always worked at the average wage for exactly 45 years receives as a pension. If the pension level falls, pensions rise more slowly than wages. The new goal is now to initially secure the pension level at 48 percent by 2040. In 2035, the government in office should present a report on how this level can be maintained from 2040.

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Heil’s team’s calculations showed that, for example, a trained nurse who will retire in 2032 after 45 years of work and a monthly salary of 3,100 euros will receive around 1,500 euros instead of the usual 1,450 euros thanks to the pension package. That’s an increase of around 600 euros per year.

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Additional financing through pension package II

In order to avoid future jumps in contributions, the federal government plans to invest billions in the capital market and use the income to pay subsidies to the pension insurance from the mid-2030s. This means that the pension insurance receives a third source of financing in addition to contributions and subsidies from the federal budget.

In order to invest the money on the capital market, the federal government wants to take on debt that is not counted towards the debt brake. In 2024 it will initially be twelve billion euros, and it is expected to increase slightly in the following years. In addition, federal assets are sold. In total, at least 200 billion euros should be invested by the mid-2030s. Ten billion euros will then flow annually from the earnings on the stock market into the statutory pension insurance.

Lindner and Heil emphasize that this is not the only solution for long-term pension financing, but it can make an important contribution. Heil and Lindner assured that it was not about speculation, but about a sensible long-term investment. In addition, an emergency mechanism is planned to mitigate risks and ensure that no citizen suffers losses.

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How much does pension insurance cost and what does the stock pension mean for contributors?

The forecast for pension spending up to 2045 is eye-catching: without reforms, according to the draft law, it would rise from the current 372 billion euros to 755 billion euros. With the planned fixing of the pension level at 48 percent, this amount is likely to rise to around 800 billion euros.

Given these figures and the aging of the population, a noticeable increase in pension contributions can be expected. Without the returns from capital market investments, the pension contribution would rise from the current 18.6 percent to 22.7 percent in 2045. Capital market income should dampen this increase somewhat. The federal government therefore expects a pension contribution of 22.3 percent for 2045.

Pension financing in the coalition – Greens report “need for clarification”.

The green coalition partners, who have so far rejected generational capital, have stated that they “still need clarification”. In particular, the Green social politicians Frank Bsirske and Markus Kurth emphasized that the project must be legally secure and compatible with EU state aid law. The Greens want to stipulate in law that the use of contribution funds for the capital stock remains excluded in the future.

The social associations, on the other hand, welcomed the stabilization of pension levels. Social association VdK President Verena Bentele emphasized that the pension level of 53 percent must be secured for everyone. The chairwoman of the German Social Association, Michaela Engelmeier, made a similar statement, describing a pension level of 48 percent as far from sufficient. The Left’s pension expert, Matthias W. Birkwald, called for an immediate, one-time and extraordinary pension increase of ten percent.

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DGB boss Yasmin Fahimi described securing the pension level as an “important signal”, but emphasized the need for an increase. With regard to generational capital, she said: “The only thing that is certain here is the risk.” IG Metall described generational capital as “a loan-financed bet on unclear returns in the future”.

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Clemens Fuest, head of the Ifo Institute, criticized that if services were promised, the financing would also have to be clarified. He emphasized the need for a longer working life, which is based on increasing life expectancy. The Association of German Mechanical and Plant Engineering (VDMA) criticized that an increase in contributions of over 20 percent was unacceptable in the medium and long term.

Does this mean the issue of pension financing is settled? No, at least not for all coalition partners. FDP leader Lindner said the Liberals could imagine doing more. The FDP proposes to theoretically expand the system, for example by having people individually pay into the capital stock. The Ministry of Finance considers this solution to be “unenforceable” in the coalition, but it is conceivable in a next step. However, Lindner emphasized that he did not want to make any additional demands that would only become relevant in the next legislative period.

“For over a century, the opportunities of the capital market in statutory pension insurance have been left behind,” said the FDP leader. “Now we use them.”


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