German Chancellor Friedrich Merz has pledged to push through a proposed reform of the country’s pension system that would include raising the retirement age gradually in line with life expectancy.
This comes as a government-mandated panel of experts and politicians delivered 33 recommendations to stabilize the pension system today. The aim is to prevent the level of pensions from falling and ward off the need for a big long-term increase of the levy employees pay into the pension system. They currently contribute 18.6% of gross wages.
Merz’s coalition of center-right and center-left parties took office just over a year ago with pledges to reform and turn around Germany’s sluggish economy, Europe’s biggest. It has since become deeply unpopular, in part because of perceptions that it has squabbled but so far achieved little.
Germany’s economy returned to modest growth last year after shrinking for two years in a row. The government expects underwhelming growth of 0.5% this year, a figure that has been pushed down by the fallout from the war in Iran.
The country of 83.5 million people already faced increasing competition from Chinese companies, higher energy costs following Russia’s full-scale invasion of Ukraine and issues including U.S. President Donald Trump ‘s tariffs and trade threats. On top of that, it has deeper problems such as high production costs, lagging private investment and increasingly costly health and pension systems, caused by an aging population.
Merz stressed that demographic changes have made reform unavoidable, warning that the country’s existing pension model is coming under mounting pressure. He asserted that Germany has long faced the problem that “fewer and fewer contributors have to finance pensions for more and more retirees,” adding, “Doing nothing is not an option.”
The proposed reforms reflect a growing recognition that longer lifespans require adjustments to ensure the sustainability of public pension systems.
Germany’s pension system has for years faced the twin challenges of an aging population and declining birth rates. As the number of retirees continues to grow, the pool of working-age people paying into the pension system has failed to keep pace, placing increasing financial pressure on public finances.
Under the current pay-as-you-go model, contributions from today’s workforce are used to fund pensions for current retirees. However, demographic shifts have steadily weakened this balance, prompting repeated calls from economists and policymakers for structural reforms.
The expert panel’s recommendations are aimed at preserving pension levels while maintaining the financial viability of the system over the long term. One of the central objectives is to avoid placing a heavier burden on employees through substantially higher pension contributions, which could affect household incomes and labour market competitiveness.
The panel’s central proposals include introducing market investments as an element of individuals’ pension insurance to relieve financial pressure on the system, based on a model used in Sweden.
Germany moved two decades ago to raise the regular retirement age from 65 to 67, implementing the change gradually. The commission proposed going beyond that to raise it in line with life expectancy starting in 2031. The life expectancy in Germany is 78.5 years for men and 83.2 years for women, according to the national statistics office.
The commission’s Co-chairperson, Constanze Janda, said that the change would affect the retirement age “moderately,” and that it would increase by about six months over 10 years if life expectancy continues to rise as it is now. In the mid-2010s, Germany started allowing people who have paid pension contributions for 45 years to retire at 63 without a financial hit.
The panel proposed scrapping that financial provision and raising the minimum retirement age to 64. It also said that the age at which people can start reducing their working hours ahead of retirement should be raised from 55 to 58.
Plenty Of Work To Get Proposals Through Parliament
Merz said his coalition intends to “implement in full,” and quickly, the proposals put forth by the commission. That intention was echoed by Labor Minister Bärbel Bas, the Co-leader of the center-left Social Democrats.
They will likely face plenty of work to get the package through parliament, where the governing coalition has a relatively thin minority. The proposals already have drawn criticism from labor unions.
As Germany moves forward with discussions on the proposed reforms, the debate is expected to focus on how best to protect retirees while adapting to profound demographic changes that are reshaping one of Europe’s largest economies.
With an aging population continuing to alter the balance between workers and pensioners, the government argues that reform has become increasingly necessary to preserve the long-term stability of the country’s pension system.
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