Forty-Five Years

On Tuesday, Chancellor Friedrich Merz endorsed a pension reform package that would fundamentally change how Germans retire. The proposals, presented by a 13-person commission of experts and politicians, aim to link the retirement age to life expectancy, abolish early retirement at 63, expand compulsory contributions to civil servants and the self-employed, and invest a portion of pension contributions in capital markets.[1]

The mathematics is straightforward. If the retirement age is tied to life expectancy, it reaches 67.5 by 2041. By 2091, it could hit 70. Germans who have paid into the system for 45 years can currently retire two years early without deductions. The commission wants to scrap that entirely, arguing that high-earning, healthy men benefit disproportionately, and that the scheme creates an incentive to retire as early as possible.[2]

Forty-four percent of Germans say they want to take early retirement. The longer they work, the more likely they are to take sick leave. The commission sees a causal link. The trade unions see something else entirely.[3]

Yasmin Fahimi, president of the German Trade Union Confederation, called the idea that Germans must work longer to keep pensions affordable "a myth designed to scare people." Christiane Benner, head of IG Metall, said the proposal to scrap early retirement "completely ignored" the life and work situations of industrial workers, who face physical and psychological stress that office workers do not. Verdi, the services union, said it showed "a total disregard for the lifetime achievements of the people concerned."[4]

The commission did include a hardship clause for early retirement, though the details are not yet specified. Philipp Türmer, head of the Jusos, the SPD's youth organisation, argued it would have been fairer to link the retirement age to the number of years contributed, not to life expectancy.[5]

The capital markets proposal is the most novel element. Each pension contributor would get an individual investment account, with employer and employee each contributing half. The amount would gradually rise to 2% of workers' pension contributions. The model is explicitly inspired by Sweden. Jan Scharpenberg, a pensions expert at Finanztip, called it "a good idea" but warned that the details matter, particularly around how the Swedes handle low-income earners.[6]

For Luxembourg, the relevance is indirect but real. More than 200'000 cross-border commuters work in Luxembourg daily, many of them from Germany. Under EU rules, pension entitlements accrued in Luxembourg are claimed from Luxembourg's system, regardless of where the worker lives. Non-resident workers who have paid into Luxembourg's pension insurance enjoy the same entitlements as resident workers.[7]

But a German resident who works in Luxembourg and retires under the German system still faces German rules. The two systems are separate, and EU coordination rules determine which legislation applies based on where the work is performed. For workers who have paid into both systems, each country pays its share proportionally. Germany's reform changes what "retirement" means for its own residents, including those who have spent part of their career across the border.[8]

The proposals must still be debated and voted on in parliament. Merz has said he wants them passed quickly, and both the CDU/CSU and the SPD have expressed support. But "quickly" in pension reform terms is relative. The last major German pension reform, under Minister Andrea Nahles in 2014, took over a year from proposal to legislation. This one is more ambitious.[9]

Nineteen million Germans were 65 or older in 2024, 23% of the population. In 1991, it was 15%. The demographic curve is not a surprise. It has been visible for decades. What is changing is the political willingness to act on it. Merz, in office for just over a year, has struggled to deliver on his promises of sweeping reforms. The pension commission is the first major policy package where both coalition partners appear genuinely aligned. Whether that alignment survives contact with parliament remains to be seen.[10]