How many people can retire early while staying within budget?

How many early retirees can we financially support?

Increasingly, individuals are choosing to retire at the age of 63, but only high earners have the means to do so, according to Ruth Schüler, a pension expert from the Institute for Work and Trade Unions (IW). This trend will likely result in younger generations having to work for a longer period.

Quiet quitting is becoming more common, with employees simply adhering to their job responsibilities but showing little enthusiasm for their work. However, a growing number of elder workers are choosing to retire early. What's driving this phenomenon?

Economic theory explains this trend. Since January 2023, the supplementary income limit for early retirement pensions has been abolished, allowing retirees to earn as much as they like without their pension being reduced. However, it remains to be seen if this will encourage more individuals to work longer. During the COVID-19 pandemic, there were already generous regulations regarding supplementary income, yet few people took advantage of them. One potential reason for this is that the additional hours of work don't always translate into significant tax benefits.

Who can afford to retire at the age of 63?

Those who can afford this option are individuals who have a substantial statutory pension to look forward to, along with additional income from private and company pension schemes or investments. The early retirement option is often sought by people with a median household income ranging from 20,000 to 26,000 euros net per year. People in the lowest income bracket are unlikely to be able to claim this pension. Even if they have completed 45 years of insurance, their income is usually insufficient for early retirement.

What does the typical early retiree look like?

The typical early retiree is generally a skilled worker from the former German Democratic Republic (East Germany) who retires without any deductions after 45 years of insurance. In general, more men than women take advantage of this option, and early retirees tend not to have an academic degree. The more highly educated an individual is, the more likely they are to continue working beyond the standard retirement age. This is supported by data from the German Socio-Economic Panel Study (SOEP) and the German pension insurance system, which were linked and analyzed for the first time in 2022 to draw these conclusions. The SOEP is a comprehensive survey that has been running since 1984 and surveys households in Germany on a representative basis regarding socio-economic topics.

Is it sustainable to have so many early retirees?

No, it's not. This places a significant strain on the pension system. In July 2021 alone, the pension fund paid out 3.4 billion euros to early retirees with no deductions. While our pension system relies on the productivity of the population, its sustainability is not in doubt. However, life expectancy is increasing, leading to longer periods during which pensions must be paid to early retirees. Against this backdrop, retiring at 63 is a poor decision.

What should be done if people insist on retiring earlier?

Flexibility needs to be increased at both the political and corporate levels. If an employee is willing to work ten hours after retiring, that should be possible. These individuals should be utilized strategically. Effective personnel management is critical. The conditions must allow employees to balance their work with their retirement plans effectively. It sounds simplistic, but there's vast potential in scheduling people who aren't working full-time in a way that benefits both the employee and the organization.

Why are there fewer women taking early retirement?

Women are less likely to exceed the 45 years of insurance required for early retirement without deductions. However, the younger generation of women aged under 45 will likely achieve longer insurance periods than women retiring today. When discussing old-age poverty among women, it's crucial to consider this dynamic. Time off for child-rearing has shortened over the years, which is good news for their future pensions. My evaluations also show that women are increasingly continuing to work even when their partner retires. This was not the case in the past.

Is it encouraging that women are prioritizing staying close to the labor market?

Yes, I believe that many women have recognized the importance of remaining connected to the workforce. The longer and more they contribute financially, the larger their pension will be. I hope that the younger generation of women can gradually close the gap between their pensions and those of men. It's clear, though, that the statutory pension alone is not enough to ensure a comfortable retirement. Everyone needs to make private or occupational provisions in some form. Women should not avoid occupational pension provision due to the birth of a child. Unfortunately, this still happens frequently.

Could the mindset of younger generations, who prioritize meaningful work over high salaries, be healthier?

It certainly benefits employers to support this perspective, especially if they want to retain workers past the statutory retirement age. If work offers more than just a salary, it will likely encourage more people to work longer.

How long will the younger generation have to work?

For the younger generation to retire at an age similar to the current early retirees, they'll need to work for an extended period.

If you want to maintain constant contribution rates and pension levels until age 70, I believe that young people are also realistic about this. The topic of raising the retirement age has the potential to create disagreements between generations, so politicians need to be cautious, especially when dealing with funded pensions. In the initial investment stage, 10 billion euros will be put into the capital market. This money will be borrowed to finance the investment, so the risk will largely fall on the younger generation. All other costs associated with early retirement will also be covered by the current young adults.

Laura Eßlinger chatted with Ruth Maria Schüler

This interview debuted on capital.de 2

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Despite the abolishment of the supplementary income limit for early retirement pensions in January 2023, many pensioners still find it challenging to afford early retirement due to insufficient income from their statutory pension and private or company pension schemes. This financial challenge is particularly evident among pensioners with lower household income.

To address this issue and ensure sustainability, pension funds should consider implementing more flexible pension policies that allow pensioners to work part-time while still receiving their pension benefits, thereby extending their working years and reducing the strain on the pension system.

Source: www.ntv.de