Just over a year into office, Chancellor Friedrich Merz’s coalition in Germany is deep in the doldrums. Hamstrung by infighting between its centre-right and centre-left partners, it has struggled to reverse Germany’s economic stagnation and waning competitiveness. Three cheers, then, for pension reform proposals unveiled last week with both partners’ apparent backing. This is the boldest move by Merz’s government since the relaxation of the debt brake for investment and defence, with positive implications beyond Germany.
Under proposals agreed by a bipartisan commission, a compulsory initial contribution of 0.5 per cent of employees’ pre-tax income, rising to 2 per cent by 2031, will go into a Swedish-style public pension fund managed centrally and invested in capital markets. Contributions are split 50/50 between employees and employers. The statutory minimum retirement age of 67 is set to rise in line with life expectancy; rights to early retirement for people with 45 years of contributions will be restricted.
Such measures have become vital to reduce the deficits of Germany’s unsustainable pay-as-you-go system. Some 16.5mn baby boomers will retire by 2036 with only 12.5mn new workers joining the workforce, according to some estimates. The government spent about a quarter of the total federal budget on plugging gaps in the system in 2024; economists say that could double to 50 per cent in two decades.