Proposal Solicited for a Directive on Commission's Initiative
Germany has unveiled a set of measures aimed at addressing the long-term financing issues of its strained pension system. The reforms, which focus on extending the pension "holding line" until 2031, slightly raising pension contribution rates, and increasing benefits for certain groups, were announced by the federal government in August 2025.
The key change is the extension of the legal guarantee for the current pension replacement rate of 48% of net income from 2025 to 2031. This is a significant commitment, as it ensures that pensioners will receive a relatively stable income for the next six years.
To fund this extension, pension contributions will increase by 0.2 percentage points starting in 2027. This means that the contribution rate will rise from the current 18.6% to 18.8%, with the increase being split evenly between employees and employers.
Another significant change is the increase in the "mother's pension" for parents (mostly mothers) who had children before 1992. From January 2027, these parents can expect to receive about €20 per child per month, which will cost approximately €5 billion annually.
The government also plans to strengthen company pensions and modernize occupational pension frameworks, a move supported by industry groups like the German Working Group for Occupational Pensions (ABA).
However, the current coalition government, comprising the CDU/CSU and SPD, has shown limited appetite for major structural reforms. Efforts to extend retirement ages beyond 67 or substantially increase working lives remain politically sensitive, with no concrete plans for significant increases to retirement age as of mid-2025.
The proposed reforms aim to balance political realities and social promises but leave significant long-term financing challenges unresolved amid Germany’s demographic decline and economic constraints. Critics argue that the measures do not go far enough to address the pension system's long-term sustainability.
Meanwhile, disagreements between the Union and the SPD over the commission's proposals for long-term pension system financing continue. SPD parliamentary group leader Dirk Wiese has criticized the approach as too simplistic and not meeting with approval.
Economist Veronika Grimm, on the other hand, has suggested that performance cuts are necessary for social security systems, including pension, care, and health insurance. She has highlighted the pension cap as an example of a long-term unsustainable measure. Grimm also advocates for honesty about which services are affordable and which are not, and for those who can financially manage care services themselves to do so.
Andreas Audretsch, Green parliamentary group deputy, has criticized further pension cuts as potentially pushing women into old-age poverty. He has also suggested enabling people to work more as a solution, which could create 850,000 more full-time jobs.
Despite these criticisms, the federal cabinet has proposed a pension law ensuring a stable pension level until 2031. The law, if passed, will provide a degree of certainty for pensioners and the wider economy in the coming years.
- The extension of the legal guarantee for the current pension replacement rate will impact the business sector, as it will require a slight increase in pension contributions starting in 2027, leading to an increase in employment costs.
- The increase in the "mother's pension" for parents who had children before 1992 is expected to be funded through the pension system, with approximately €5 billion annually allocated for this purpose, impacting both the politics and finance aspects of the country.
