Pension reform

A Vain Hope

  • Why it matters

    Why it matters

    Germany has seen many pension reforms since the end of World War II. With the population aging, the new government will have to address several issues to keep the program running smoothly.

  • Facts

    Facts

    • In 1957, the German government first introduced a pay-as-you-go “dynamic pension” system. Since then a patchwork of measures and new rules have been introduced.
    • Germany’s aging population and lower birth rates are putting pressure on the pension system. This is one argument for widening the pool of German workers paying into the pension fund.
    • Compared to other countries, rates of old-age poverty remain relatively low in Germany, affecting around 3 percent of those above retirement age.
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    Audio

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Elderly woman pushes walking frame through shopping centre in Berlin
Moving on: Germany's pension system is made up of a patchwork of rules and needs reform. Source: Reuters

In most countries, a pension is seen as maintaining a person’s standard of living if it pays out about 70 percent of their average income from his or her last few working years. Only this measure hasn’t been reached in the history of Germany’s statutory pension system.

That’s because individual pensions have been calculated in accordance with the principle of “contribution equivalence” ever since 1957. Under this principle, the first few years working, where pay is usually relatively low, have the same impact on the pension paid out as the last few years before a person retires, during which the highest salaries are usually earned.

Contrary to popular belief, the calculations are then based on the “standard pension” of a fictitious retiree who paid contributions from his or her average wage for 45 years. The pension level is the ratio between this standard pension and the person’s own average wage.

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