Germany's government wants its major pension reform passed by the Bundestag before the end of 2026. At a coalition committee meeting, the Christian Democrats (CDU), the Christian Social Union (CSU) and the Social Democrats (SPD) agreed to convert the recommendations of the Commission on Old-Age Security into a legislative package.
For millions of workers, the change would represent a significant intrusion into their life plans.
Retirement at 67 is not intended to mark the endpoint. According to the commission's recommendations, the statutory pension age would keep climbing after 2031 should life expectancy continue to rise. Any additional years of life would be divided between work and retirement at a two-to-one ratio, meaning those who live longer would also have to work longer.
The option of retiring at 63 with no reduction in benefits is also set to be phased out. It currently applies to those with especially long contribution records, who have been able to retire early after 45 years of contributions. The commission recommends eliminating this provision. For long-term contributors, the earliest possible retirement age would climb from 63 to 64 and would thereafter track the statutory pension age.
Retirement Will Come Later
Chancellor Friedrich Merz and Labor Minister Bärbel Bas said after receiving the commission’s report that they wanted to implement the package in full. The government rejects the idea of separating out individual elements. The new coalition paper sets out a timetable: the legislative package is to be adopted by the end of 2026.
The commission wants to link pensions more closely to demographics and working life. Payments should continue to rise with wages, but the sustainability factor would be restored. This mechanism slows pension adjustments when fewer contributors have to finance a growing number of pensioners.
At the same time, a new funded pillar is to be created. Contributors would receive individual capital accounts. The plan provides for an additional contribution of 2%, financed equally by employees and employers and invested centrally on the capital markets. Germany is to take its cue from countries such as Sweden.
This would change the structure of the pension system. The statutory pay-as-you-go scheme would remain, but it would acquire a mandatory funded component. Workers would continue to pay for today’s pensioners while also building up their own capital reserves.
The group of contributors is also to expand. Newly self-employed people would be required to join the statutory pension insurance system. Those already self-employed would also generally be covered, but would be given an opt-out. Members of parliament and management board members of German stock corporations would also become subject to mandatory pension insurance.
The commission takes a more cautious approach to civil servants. Reforms in the statutory system are to be mirrored in civil service pensions. In addition, fewer new officials are to be granted civil servant status. Full inclusion of civil servants in the pension system is therefore not at the center of the plans.
Mini-Jobs and Welfare Under Scrutiny
The commission proposes a break with the special status of mini-jobs, Germany’s system of low-paid marginal employment. Such jobs would be included in statutory pension insurance without an opt-out. Exceptions would be made only for school pupils. At the same time, the coalition wants to raise the flat tax rate on mini-jobs from 2% to 5%.
The reform also addresses poverty in old age. Those who have paid contributions would be allowed to keep more when receiving basic income support. To this end, the commission recommends higher allowances for statutory pensions.
The forced retirement of the long-term unemployed is to be permanently abolished. Employment offices would then no longer be able to push those affected into early retirement on reduced pensions.
More Than Pensions
The pension reform is only the beginning of the coalition’s 34-point package. It is to be followed by tax cuts for low and middle incomes, tougher rules against welfare abuse, longer fixed-term contracts without employers having to give a reason, stricter sick-leave rules and fewer reporting obligations for companies.
From 1 January 2027, the coalition wants to cut income tax. Families with two children and taxable income of €60,000 ($68,300) are to receive more than €600 ($683) in annual relief from 2028. Top earners are to pay more. A rate of 45% is planned from €250,000 ($284,600) in taxable income and 47% from €280,000 ($318,700).
The scale of the measure has already drawn early criticism. At €10bn ($11.4bn) a year, the relief is small measured against the federal budget. Some of that amount, besides, comes from adjustments to the basic tax-free allowance and cold progression that were politically almost unavoidable. At the same time, the coalition is placing a heavier burden on top earners. Germany is thus becoming less attractive, from a tax perspective, to entrepreneurs, high earners and internationally mobile professionals.
On welfare fraud, the labor and interior ministries are due to present an action plan later in July. Data exchange between authorities is to be improved, and anyone wanted under an arrest warrant would no longer be entitled to benefits under Germany's welfare codes. Certain entitlements would additionally be tied more closely to lawful residence.
The labor market, too, is set for tougher rules. Employers would be allowed to offer newly hired staff fixed-term contracts without giving a reason, for up to 48 months until the end of 2030. Sick notes issued by phone are to be abolished, and a medical certificate would be required from the first day of illness onward.