The federal government wants to keep the pension level at 48 percent in the long term. Disadvantage of this plan: The pension insurance costs a lot of money. That’s why the Bundesbank has another suggestion: increasing life expectancy should be taken more into account. In other words, the retirement age continues to rise. The alternative would be massively increasing contributions.
The Bundesbank believes that linking the retirement age to life expectancy could stabilize the statutory pension system in the long term. The experts point out that in many countries of the European Union, the age at which people retire is now increasing with life expectancy. That’s what the money experts write in their monthly report for June.
Consequence of the proposal: Employees would have to work longer because they later enjoy the fruits of their pension insurance for longer and longer – because life expectancy continues to increase. A further increase in the retirement age would of course affect younger employees in particular, who still have a long working life ahead of them.
The thrust of the Bundesbank’s proposal is clear: the study states that “the contribution phases will also be lengthened”. The central bank’s economists explain that this reduces the pressure on politicians to keep having to adjust other variables such as the contribution rate and the tax-financed funds of the federal government for the pension fund. Also, the retirement age would not have to be debated regularly.
Currently, the retirement age is gradually being raised to 67 years. This affects insured persons who were born in 1964 or later.
The SPD, the Greens and the FDP have set themselves the task of securing the minimum pension level – i.e. the ratio of the pension to the average wage – of 48 percent “permanently”. The traffic light partners ruled out pension cuts or an increase in the retirement age. Instead, they promised to save new capital for the pension fund: as a permanent fund, professionally managed and invested globally.
This concept is called “share pension”. Even if it were to come, experts warn that capital would need to be accumulated over a long period of time before “stock pension” monies could flow to retirees. This model is therefore unsuitable for quickly closing the ever-increasing financial gaps in statutory pension insurance.
Here is a number: the federal government supports the German pension insurance with around 100 billion euros per year in the form of grants. If the money didn’t flow, pensions would have to fall – or contributions would have to rise significantly. The consequence of this would be that employees would retain less net income and that rising non-wage labor costs would continue to weigh on the economy.
In 2019, the Bundesbank fueled the debate about a further increase in the retirement age to almost 70 years. However, such a step is considered politically hardly enforceable. Both SPD and Union want to stick to the pension at 67.
In its current monthly report from June 2022, the Bundesbank reaffirms the financial challenges for the statutory pension in Germany. However, the experts outline a solution: “The simulations up to 2070 show that the pressure on pension finances will ease noticeably if the retirement age continues to increase gradually after 2031.” would have to increase significantly. In the long term, however, this increase will be lower than with an unchanged retirement age of 67 years.
The Bundesbank calculated the consequences if the pension level to the statutory pension was permanently fixed at 48 percent. By 2070, the contribution rate would rise to 29 percent. It is currently 18.6 percent, which employees and employers share.
The Bundesbank forecast thus determines a possible increase in the pension contribution rate of 10.4 percent. What does not sound particularly dramatic at first glance would, however, place a heavy burden on employees and companies.
The “Bild” newspaper makes this clear with a calculation example:
With a gross monthly income of 3000 euros, Mr A. currently has around 2018 euros net. The pension contribution – currently 18.6 percent, of which 9.3 percent for the employee, the other half is paid by the company – is 279 euros.
If the contribution rate increases to 29 percent, as predicted, Mr. A. will have to make do with significantly less net: He then only has 1882 euros left. The monthly minus of 156 euros adds up to 1872 euros per year!
According to the Bundesbank, even with an increase in the contribution rate to 29 percent, the state aid figures for the pension fund would have to continue to rise. The experts write: “Federal funds are also growing much faster, and the federal budget is coming under considerably more pressure.” In order to fill the state coffers, VAT would have to rise by six percentage points. With the corresponding consequences for prices and the net income of employees.
The Bundesbank makes a second suggestion as to how the finances of the statutory pension insurance system can be stabilized in the long term: according to this, the pensions of retirees should only increase by the rate of inflation after they retire. So there would no longer be any real income increases for retirees, instead the pension insurance would only compensate for the current rates of price increases.
All of this shows that employees should also make private provisions before reaching retirement age. There are many ways to do this, some subsidized by the state.
Several providers advertise with such policies. However, consumers should refrain from doing so: Even if the interest rates on credit balances are slowly rising again – in view of the high inflation, the bottom line is that consumers are paying more. It’s likely to stay that way for a while.
Riester savers receive government grants. However, the financial aid is only available if you make your own savings: In order to receive the maximum allowance, working people must pay in at least four percent of their pensionable income – minus the state subsidy.
The funding is broken down as follows:
However, the Riester pension has fallen into disrepute because providers charge very high costs. That depresses the return. Nevertheless, thanks to the lavish state allowances, the Riester pension is particularly worthwhile for low earners and single parents with children.
Here, too, citizens receive financial aid. The bAV is considered the second pillar of the German pension system and offers several advantages:
The employer converts part of the employee’s gross salary directly into a company pension scheme. The state promotes the model because the Treasury does not charge taxes and social security contributions on these amounts during the savings phase – albeit with a limit.
The so-called basic pension, also known as the “Rürup pension”, has existed since 2005. Anyone who pays into the basic pension saves taxes. The Federal Minister of Finance waives taxes up to certain maximum amounts.
These are the current requirements:
The maximum tax savings are for the self-employed – they can fully deduct the amounts mentioned. But “normal” employees can also conclude a basic pension contract. For high-earning employees, a basic pension should be particularly worthwhile due to the tax advantage.
Employees who are subject to pension insurance can also pay additional amounts to the statutory pension insurance. The Deutsche Rentenversicherung (DR) makes this possible, so that early retirees can compensate for their later pension losses. Anyone who transfers these extra payments and later only retires at the regular age of 67, for example, can increase their state pension. However, there is one requirement: Anyone who wants to use extra payments must be at least 50 years old.
Tip: Buying pension points is particularly worthwhile in 2022. As a result of the Corona crisis, the so-called average salary of all pensioners has recently fallen – that is the basis for the calculation. Currently applies:
In the current year, a so-called pension point costs 7235.59 euros. In 2021, the amount was still 7726.63 euros – almost 500 euros higher. There is a pension point for that. According to the current value in the West, it brings a monthly pension of 34.19 euros – for life.
The pension will increase significantly on July 1, 2022 – then the value of a pension point will also increase by a good five percent. The value then climbs from 34.19 to 36.02 euros in the west. In the new federal states it is currently 33.47 euros, from July 2022 it will be 35.52 euros. That is even an increase of 6.12 percent.
The FOCUS Online Guide answers all important questions about pensions on 135 pages. Plus 65 pages of forms.
In addition to the above options for private old-age provision, there are other forms – such as buying a property. Anyone who buys real estate saves on rent if they use the apartment themselves. Or he earns money monthly when he rents them out. However, interested parties must raise a large amount of equity.
Another variant is available for investors who want to build up assets over the long term with smaller amounts. The stock market can help with that. Because despite the current price turbulence as a result of the Ukraine war and high inflation: stock market investments offer the highest return opportunities in the long term.
Instead of relying on individual stocks, experts recommend buying ETFs (“Exchange Traded Funds” – a type of exchange-traded equity fund). ETFs contain a large number of values and can thus cushion price losses in individual investments. Some ETFs even invest worldwide. Another advantage of ETFs: They only burden investors with low costs.
If you want to diversify your investment, you should take a closer look at ETFs on the world stock index MSCI World. They distribute their investments in around 1600 different stocks from 23 industrialized countries. Investors have several products to choose from, one established ETF is the iShares CORE MSCI WORLD UCITS ETF.
Anyone who cannot make big financial leaps should choose an ETF savings plan. Some providers offer them for as little as 20 euros a month. The following applies: If you hold out for a long time, you can save considerable amounts.
If you want to create an ETF (Exchange Trade Fund) as a savings plan, you have to open the right securities account. Compare Germany’s online banks and neo-brokers by offer, price and service for your ETF savings plan.
