future prospects of your pension might demand an exorbitant cost.
The pension system in its current state isn't enough for many elderly folks and is still in the process of development. Labor Minister Hubertus Heil believes the solution lies in raising contributions, making it more costly for individuals.
The objective of pension package II is to ensure at least a 48% minimal pension level past 2025. However, with an increasing elderly population and less young contributors in the future, this goal may prove challenging. The legislature has three ways to address this: raise the retirement age, hike contribution payments, or reduce benefits.
Should Minister Heil have his way, contributions to statutory pension insurance would gradually increase over the years, accompanied by the creation of a debt-funded fund to assist in pension payments through capital market investments in the mid-2030s. This is known as "Generations Capital." Over the long run, this is intended to alleviate contributors and the national budget.
Contributions could surge by 20%
Let's focus on the current pay-as-you-go pension system and the contribution rates for contributors. If the minister's plans are implemented, contribution payments to pension insurance by employees and employers will significantly increase from 2028: by 2035, the contribution rate would increase from the current 18.6% to 22.3%. This equates to a 20% increase in contributions.
Currently, the contribution rate is 18.6%, with half paid by employees and half by employers, at 9.3% each. By 2035, the employee's share could increase to a total of 11.15%, following a 10% increase in contributions in 2028. For instance, with a monthly gross income of 3000 euros, this would mean added monthly expenses of 21 euros from 2028 and 55.50 euros from 2035. With a gross income of 5000 euros, the pension contributions would increase by 35 euros (2028) and 92.50 euros (from 2035).
Controversial pension plans
It's essential to note that since 2023, taxpayers have been able to fully offset their contributions to statutory pension insurance through their tax return. This slightly lessens the state burden. For a single person with a gross income of 36,000 euros, this amounts to 36 euros yearly, and for a couple with a child and a gross income of 60,000 euros, this is roughly 56 euros yearly. Nevertheless, an average annual gross income of 45,358 euros would decrease by almost 840 euros yearly.
Resistance against the planned burdens of pension package II comes mainly from the FDP within the government, advocating for an expansion of the so-called "true" equity pension desired by Finance Minister Christian Lindner. However, the Federal Association of Taxpayers also criticizes the parallel increase in state pension expenditure - projected to reach approximately 500 billion euros by 2045. Moreover, the state will need to accumulate debts of up to 200 billion euros by the mid-2030s to benefit from "Generations Capital."
I'm not going to sugarcoat it: The proposed increase in pension contributions could be a significant burden for many individuals.
Despite the tax relief option since 2023, the overall impact of the pension package II on personal budgets remains a concern for many, especially with the potential 20% surge in contributions by 2035.
