Germany Overhauls Pensions: Higher Retirement Age and New Funding Models

The German government has announced major changes to the pension system. Chancellor Friedrich Merz confirmed plans to adopt the Pensions Commission’s proposals in full. These include extending working lives and introducing new funding models. In the 1950s, Chancellor Konrad Adenauer shifted from a capital-funded pension system to the current pay-as-you-go model. This change came after two world wars left the country with little capital to sustain the old system.

The statutory pension system has since remained stable. Over the past 20 years, the share of pension spending in GDP has actually fallen. Yet the government now sees the need for reform.

The Pensions Commission has recommended that workers and employers each contribute up to 1 percent of gross wages to a capital-funded scheme. However, such capital-based pensions offer no guaranteed returns above 3 percent annually.

The government also plans to link the retirement age to life expectancy. This would effectively reduce pension payments by extending working years. Critics argue this move disproportionately affects lower-income groups, who generally have shorter life spans. A minimum pension will be introduced to ensure a dignified standard of living for recipients. This will be funded through increased federal subsidies. The reforms aim to balance sustainability with fairness in the pension system.