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Pension: Does the emergency brake have to be pulled? Contribution rate skyrockets to unaffordable heights

Highest pension increase in the West in forty years

Highest pension increase in the West in forty years

The federal cabinet has decided on a significant increase in pensions: In western Germany, pensions will rise by 5.35 percent on July 1 and by 6.12 percent in the east – in the old federal states it is the highest pension increase in almost forty years.

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In July 2022 there will be the highest pension increase in decades – but how long will this continue to work well in this system? The pay-as-you-go pension system has shaky feet. The demographic change in society is to blame. There are too few young contributors and the situation will only get worse.

A new calculation by the Bundesbank shows how extreme this imbalance will be in the future. One thing is clear: things cannot go on like this for the long term pension.

Pension: Is politics pulling the emergency brake? Contribution rate skyrockets to unaffordable heights

The traffic light government has agreed that the pension level will not fall below 48 percent by 2025. At the same time, the contribution rate should remain below 20 percent in this legislative period (currently 18.6 percent). The SPD in particular does not want to shake the pension at 67. But how much longer can all this be done?

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pension – more about statutory pension insurance:

  • was introduced in Germany in 1891.
  • In 2020 there were over 21 million pensioners in Germany.
  • The contribution rate to the statutory pension insurance is currently 18.6 percent.
  • Half of this is borne by the employee and half by the employer.
  • The Riester and Rürup pensions, on the other hand, are two forms of private old-age provision with state subsidies.

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The Bundesbank has now determined in a model calculation that the contribution rate for pension insurance would be 29 percent in 2070 if this pension level was maintained. In addition, the federal budget would have to add billions in subsidies from tax revenues by then, which would correspond to a sales tax increase of six percentage points. It would therefore be an extreme additional burden, especially for those who would then be employed.

Pension can no longer be financed: the system is threatened with financial collapse

In a second scenario, the Bundesbank assumed that the pension level would adjust. It would then be just 43 percent at the end of the 2030s and even just 40.45 percent in 2070. In this case, however, the contribution rate would continue to skyrocket, reaching 25 percent in 2070.


In addition, there are the necessary subsidies from the federal budget, which would correspond to a VAT increase of four percentage points. Even this milder scenario is therefore hardly future-proof – neither for the contributors nor for those who would then receive relatively significantly lower pensions than today’s pensioners.

Pension increase as inflation compensation?

So what to do? The Bundesbank proposes two solutions: First, a higher retirement age is needed. Here, the experts suggest linking life expectancy and retirement age! If people live longer on average, they should retire later. On the other hand, future pension increases should no longer be linked to wage developments, but to inflation.

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On average, the pension should rise less, but would be able to further compensate for price increases.

Germany needs a major pension reform after 2025 at the latest in order to stabilize the pay-as-you-go system. This will probably not be possible without social hardship, unless there is suddenly a new baby boom or the immigration of many more foreign skilled workers as new contributors underpins the system.



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J. A. Allen

Author, blogger, freelance writer. Hater of spiders. Drinker of wine. Mother of hellions.