Pension Reform

Cost of Social Safety Nets Set to Soar

  • Why it matters

    Why it matters

    A booming economy combined with all-time high employment have helped Germany’s extensive social benefits system run an overall surplus. But the surplus is eroding fast, and neither the demographic trends nor the reformed passed by the government will put a stop to this.

  • Facts


    • The social insurance overall surpluss is expected to fall from €4 billion to €1.8 billion next year, despite record low unemployment numbers.
    • Former social democratic Chancellor Gerhard Schröder once declared that social insurance contributions should not exceed 40 percent of taxpayers’ gross incomes. But the German government has never been able to keep that ratio under this golden ratio for long.
    • Taxpayers pay on average almost 19 percent of their gross incomes in pension contributions. This might exceed 20 percent between 2020 and 2030, but state pensions are still rapidly decreasing.
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Bundestag zum Haushalt 2017
Labor minister Andrea Nahles is pushing for higher retirement contributions to counter sinking pensions after 2030. Source: Kay Nietfeld/DPA.

Here’s the good news on the decisions the German government reached on pension reform last week: Compared to the other social reforms that were implemented during the current legislative period, they are not very costly.

For example, the planned improvements for those unable to work due to disability will come into force in small steps by 2024. After that, they will cost the pension fund €3 billion ($3.18 billion) per year.

The conservative-led coalition has also decided to further stretch out the adjustment of pensions in eastern German states to levels in the western region. The adjustment process was supposed to be completed by 2021 at the latest. But it will now be achieved between 2018 and 2025, at a total cost of up to €3.9 billion to be spread over those seven years.

“By that point, eastern Germans’ pensions should probably catch up with  western Germans’ anyway,” said Joachim Ragnitz from the Ifo economic research institute, provided that wages in the east rise a little more than they do in the west in the future.

This is hardly a cause for reassurance, given that the really expensive reforms have long been on the books. These start with the €6.7 billion per year retirement pension reform for parents and end with the healthcare and long-term care reform, which together will cost more than €10 billion a year.

“The statutory health insurance is not set up sustainably”

Jens Boysen-Hogrefe, Economics researcher, IfW

The latest findings from the Institute for the World Economy, or IfW, for Handelsblatt show the extent to which the consequences are already being felt in the run-up to the 2017 general election. For example, the social insurance surplus is set to drop by more than half from €4 billion to €1.8 billion, despite record low unemployment. The fact that there will be a surplus at all is due to unemployment insurance: It will generate a nearly €5 billion surplus next year.

The long-term care insurance should see a moderate €1 billion surplus despite considerable increases in benefits.

IfW researcher Jens Boysen-Hogrefe sees potential for a reduction in contributions. “The ongoing surpluses should be taken as an opportunity to think about the contribution rate,” he said.

This, however, is unlikely to happen. Despite the overall surplus, two important pillars of the social security are set to see a shortfall next year regardless.


The IfW predicts the state pension deficit will amount to €3 billion in 2017 while the statutory health insurance program will incur a €1 billion loss. And this development is despite the high rate of employment and the fact that supplemental health insurance premiums have already risen from an average of 0.9 to 1.1 percent under the supervision of current health minister Hermann Gröhe, a Christian Democrat.

“The statutory health insurance is not set up sustainably,” Mr. Boysen-Hogrefe said.

According to official 2017 estimates, an increase of the average supplemental contributions by at least 0.1 percent should be necessary. However, Mr. Gröhe has resorted to a trick to prevent the increase: For 2017, he will transfer an additional €1.5 billion from the liquidity reserve of the German healthcare fund, established in 2009, to the public insurers’ coffers. The €1.3 billion healthcare deficit expected by economists is thus likely end up being a small surplus.

Mr. Gröhe says he is doing this to cover the additional expenses caused by the refugees and the introduction of electronic health cards. Opposition and trade unions see it differently: Mr. Gröhe wanted to spare himself a debate about supplementary premiums in an election year. Without this workaround, social insurance contributions would exceed 40 percent of gross incomes as early as 2017.

Former social democratic Chancellor Gerhard Schröder once declared this 40 percent golden threshold a critical mark for the competitiveness of the German economy. Angela Merkel promised not to cross that threshold when she took over as chancellor in 2005. But after the next Bundestag election in the autumn of 2017, breaking this promise might not be avoidable, even with tricks.

Pension contributions are set to exceed 23 percent of contributors’ gross incomes because starting in 2025 the German baby boom generation will gradually go into retirement

According to information Handelsblatt has obtained from health insurance companies, a jump in supplementary premiums from 1.1 to 1.42 percent is expected in 2018. In 2019, there’s already an increase expected to 1.61 percent. The total cash contribution will have risen from 15.5 percent to 16.01 percent from the beginning of this legislative period through the middle of the next one.

In pension insurance, too, the reserves are melting. Even if the economy continues to do well, contribution to pensions will have to be increased from 18.7 to 18.9 percent of gross income by 2022 at the latest, if there are no additional reforms. And it won’t stop there.

According to current law, however, the pension contribution cannot exceed 20 percent before 2020 and  22 percent before 2030. The law will likely remain unchanged, even in the event that social democratic Labor Minister Andrea Nahles’s proposal for a higher pension level in the future should come to fruition. The proposal, anyway, has thus far been rejected by Chancellor Angela Merkel’s center-right Christian Democratic Union party in the governing coalition.

Only after 2030 does Ms. Nahles want to allow the increase in pension contributions to go as high as 25 percent to stabilize the shrinking retirement benefit levels at 46 percent of average income. Otherwise, the pension level, which currently stands at 48 percent, is set to drop to 41.7 percent.

Even without such a policy change, pension contributions are set to exceed 23 percent of contributors’ gross incomes because starting in 2025 the German baby boom generation will gradually go into retirement.

Due to the aging population, experts also expect to see significant increases to long-term care and health insurance premiums. According to economist Martin Werding, the social insurance contributions could rise from today’s 40 percent to 48 percent in the medium term. “The key challenge in the next few years will be to keep the rise in social insurance contributions as low as possible,” said Ralph Brinkhaus, the deputy CDU chairman in the Bundestag.



Peter Thelen writes about social security systems, the job market and labor topics. Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the authors:,

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