Pension system requires drastic transformations, according to recent reports
Germany is currently grappling with a significant pension reform, aiming to address the financial sustainability caused by demographic shifts and evolving market conditions while ensuring retirees receive an adequate pension [1][2][3][4].
The country's population is aging rapidly, with projections indicating that by 2040, 25% of Germans will be aged 67 or older. This demographic change, coupled with a shrinking worker-to-retiree ratio, has put a substantial strain on the pension budget [1]. To alleviate this strain, the government is exploring extending working life, with Economy Minister Katherina Reiche advocating for longer working hours [1]. However, raising the retirement age beyond 67 remains a politically sensitive issue.
The coalition agreement promises a pension at the age of 63, but some critics argue that maintaining the pension level at 48% of average income until 2031 may be unsustainable amid demographic pressures [1]. In fact, if reforms are not implemented, pension costs could potentially exceed 11%. This predicted rise in costs could potentially exceed the promised 48% pension level [1].
Parallel to these demographic and fiscal challenges, Germany’s pension system currently lags behind other EU countries, with pension levels about 14 percentage points below the EU average [2]. To modernize the pension system, financial industry leaders advocate for reforms such as combining pension products, introducing flexible payout options, removing mandatory guarantees to allow investment in capital markets, and expanding eligibility to all taxpayers [2].
On the corporate side, funding ratios for company pension plans have improved notably, reaching 87.1% for DAX companies in the first half of 2025. This improvement shows stronger funding status amid a challenging environment but does not directly alleviate public pension pressures [3].
Social challenges persist as well, with a record 742,000 pensioners depending on welfare payments (Grundsicherung) as of March 2025. This highlights income inadequacy among retirees, with a significant portion being non-German citizens [4].
The economists, including Marcel Thum of the ifo Institute in Dresden, advocate for a comprehensive reform of the German pension system to address these challenges [5]. Some proposals include linking the retirement age to life expectancy and abolishing the pension at 63 [5]. A study commissioned by the Friedrich-Naumann Foundation predicts that a comprehensive pension reform is necessary to keep pension costs at 10% of the social product by 2050 [6].
In summary, Germany's pension reform aims to strike a balance between financial sustainability and retiree adequacy. This involves potentially adjusting retirement age policies, stabilizing or raising contribution rates, and modernizing the pension system to include more capital-based savings options. The ultimate goal is to address the financial sustainability driven by demographic shifts and evolving market conditions while confronting social welfare dependencies.
Business leaders are advocating for pension reforms in Germany to modernize the pension system and address the financial challenges arising from demographic shifts. These reforms include combining pension products, introducing flexible payout options, removing mandatory guarantees, and expanding eligibility to all taxpayers [2].
Politics play a significant role in the pension reform debate, as raising the retirement age beyond 67 remains a sensitive issue [1]. Economists, such as Marcel Thum of the ifo Institute, are pushing for comprehensive reforms, suggesting the linking of retirement age to life expectancy and abolishing the pension at 63 [5].
