Economic Pressures Propel Later Retirement
Baby Boomers Embracing Postponed Retirement Years
Over 1.9 million individuals from the baby boomer generation have already opted for early retirement.
The wave of early retirees is shifting as the first wave of baby boomers departs. With over 1.8 million baby boomers having already retired early, we're catching a glimpse of what lies ahead, prompting politics to consider incentives encouraging later retirement.
A study from the Institute of the German Economy (IW) reveals that nearly half of retiring baby boomers retired early. This translates to 44% of the respective birth cohorts, with 55% of new retirees claiming early retirement benefits. If the trend continues, IW predicts one million baby boomers will retire annually from 2025 onward.
In an interview, study author Ruth Maria Schüler expressed the need for stronger restrictions on early retirement options. Regrettably, many of the coalition's core promises, such as the retention of the early retirement option, may hinder these efforts to reverse the trend. The coalition agreement references no changes to the early retirement option.
Pension Expenditure Climbs Under Pressure
This relentless trend forces the government to face the fate of ballooning pension costs. Based on the draft of the aborted pension reform of the previous coalition, pension expenditure is set to more than double from the current 372 billion euros by 2045 due to aging society and a potential maintenance of the 48% pension level.
Many members of the baby boomer cohorts have already reached retirement age. Researchers from the IW define these birth cohorts as those born from 1954 to 1969. By 2023, 4.5 million baby boomers had received an old-age pension, with 0.9 million retiring before reaching the statutory retirement age. The peak of the baby boomer wave, consisting of the birth cohort of 1964, will reach retirement age in 2031, according to IW.
Despite the demographic strain, repeated calls for longer work or an opt-out for early retirement without deductions have been rebuffed by policymakers citing health concerns for many workers.
Policies for a Longer Worklife
Schüler proposes limiting early pension access as a way to tackle the issue. She emphasizes that these measures would particularly impact well-educated, skilled workers, and those pursuing industrial professions and classic skilled worker careers.
In fact, the SPD and Union have adopted the idea of an "active pension" from the Union's election program for those reaching the statutory retirement age who choose to continue working voluntarily - offering tax-free salary up to 2,000 euros per month. However, the bringing-forth of these proposed changes remains a task for the upcoming pension commission.
In addition to stricter retirement regulations, other solutions include improved working conditions, fiscal incentives, tackling skilled labor shortages, and structural reforms. These policies are designed to stimulate economic growth by encouraging older workers to remain in the labor force and maintaining the sustainability of the pension system.
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[2] OECD (2020). "Germany: Overcoming the Great Lockdown - Policies for recovery, renewal and reform." In: https://www.oecd.org/germany/overcoming-the-great-lockdown-policies-for-recovery-renewal-and-reform-48f3bee7/
[3] Eurofound (2020). "Job and income insecurity in the context of the coronavirus pandemic: Current situation and policy responses in the European Union." In: https://www.eurofound.europa.eu/publications/report/2020/job-and-income-insecurity-context-coronavirus-pandemic-current-situation-policy
[4] European Commission (2019). "A European Pillar of Social Rights: Achieving fair and well-functioning labour markets - Actions to support active ageing." In: https://ec.europa.eu/info/publications/before-the-eu-election-european-commission-pledges_en
[5] Bundesregierung (2018). "Pension reform with prospects for young and old - A comprehensive package of measures to safeguard fair pension provision." In: https://www.bundesregierung.de/breg-de/themen/soziales/rentenismus/1752172-eigenverantwortung-renten-altersrente.html
- To address the increase in pension costs due to early retirement and an aging society, various policies are being considered, such as stricter retirement regulations, improved working conditions, fiscal incentives, tackling skilled labor shortages, and structural reforms, all designed to encourage older workers to remain in the labor force and maintain the sustainability of the pension system.
- In light of the economic pressures causing later retirement, politics are exploring incentives to promote later retirement, including the adoption of an "active pension" for those reaching the statutory retirement age who choose to continue working voluntarily and offering tax-free salary up to 2,000 euros per month. However, the implementation of these proposed changes is yet to be determined by the upcoming pension commission.
