Estably Blog | Retirement provision
Pension reform in Germany:
What impact will Lindner's dismissal have on retirement provision?
Published on 26.11.2024
Did former Finance Minister Christian Lindner make a mistake? His controversial “Economic Turnaround Germany” paper overturned numerous adopted budget plans to finance tax cuts for the economy through savings on climate, pensions and citizens’ income. But his ambitious Pension Package II, which was supposed to revolutionize old-age provision, is now also on the brink.
The most important points in brief:
- Pension package II, which is still in the process of being adopted, is unlikely to be implemented
- The pension reform should maintain the pension level at a minimum of 48% until 2039
- An additional retirement provision portfolio should promote private equity investments with subsidies, tax exemption and options, thereby increasing personal responsibility and relieving the burden on pension funds
- Due to demographic change, there are now only 1.8 contributors for every pensioner
- However, tax-subsidized capital market investments in an insurance wrapper already offer good alternatives today
The future of pension provision in Germany is on shaky ground. With the dismissal of former Finance Minister Christian Lindner, the ambitious Pension Package II, which was intended to secure pension insurance in the long term and promote private equity investments, is in danger of finally failing. In view of demographic change, financial security in old age is becoming increasingly challenging. Even today, every pensioner in Germany is faced with an insufficient number of contributors, which means that many are dependent on additional basic benefits.
But what consequences will Lindner’s withdrawal have for the planned pension reform? And what alternatives are there to future-proof pension provision? In this article, we take a look at the initial situation, the planned reforms and show you which strategies you can use for your personal pension provision. You can look forward to the following points in detail:
Contents
- 1.1 Brief overview of the German pension system 1.1.1 German Federal Pension Insurance (DRV) 1.1.2 The three pillars of old-age provision: statutory, occupational, private
- 1.2 Pension level, demographic change and contribution rates
- 1.3 Perspective
- 2.1 How was Pension Package II intended to safeguard pension insurance?
- 2.2 What roles did the “traffic light” government and Christian Lindner play?
- 2.3 What options does the federal government now have?
- 4.1 Saving with attractive overnight and fixed-term deposit interest rates
- 4.2 Buy gold as inflation protection and store it safely
- 4.3 Invest in broadly diversified and high-performing funds
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1. initial situation of old-age provision in Germany
The three-pillar system of old-age provision in Germany is often praised as a stable pillar for financial security in old age – but does it deliver what it promises? Although the statutory pension forms the basis, for many it is far from sufficient on its own. According to statistics from German Pension Insurance, the German standard pension is currently just 1,769.40 euros gross, or 1,543.00 euros net. By comparison, the average income of Germans in 2024 was around 45,358 euros gross per year (or around 2,284 euros net per month).
Although company pension schemes offer additional options here, they are not always accessible to everyone. And private pension provision? It requires personal initiative and often also financial leeway, which not everyone has. This system may be well thought out in theory, but in practice it is clear that without personal responsibility and long-term planning, there is a risk of gaps that not everyone can fill.
1.1 Brief overview of the German pension system
In Germany, the statutory pension is based on a pay-as-you-go system: working people pay contributions into the pension fund, which are used to finance the pensions of current pensioners. The amount of the later pension depends on the so-called pension points that are collected during the working life. Pension points reflect individual income in relation to average earnings. One pension point currently corresponds to an annual gross income on a median basis in Germany, currently 45,358 euros. After 45 years of contributions, insured persons currently receive a gross pension of EUR 39.32 per month per pension point (the same for East and West). The pension amount is capped by the contribution assessment ceiling, so that even top earners can receive a maximum of around 3,538 euros gross or around 3,000 euros net per month.
This regulation ensures that the pension does not increase indefinitely, but also ensures that high contributions are not always rewarded proportionally – a point that repeatedly triggers discussions about the fairness of the system. However, factors such as child-raising periods or unemployment can also influence the pension amount. Compulsory contributions are paid by employees, while the self-employed and freelancers have to decide for themselves whether they want to pay in. This remains critical: Is this enough for a carefree old age? In the following, we therefore take a closer look at the pension system.
1.1.1 German Federal Pension Insurance (DRV)
The German Pension Insurance Association (DRV) is the central institution for statutory pension insurance in Germany. As the largest institution, it administers old-age provision for millions of insured persons and pensioners. Its main tasks include calculating and paying out pensions, recording insurance periods and providing advice on all matters relating to old-age provision. In addition to old-age provision, the DRV also plays a key role in providing cover in the event of reduced earning capacity. The reduced earning capacity pension provides important financial support for insured persons who are no longer able to work or can only work to a limited extent for health reasons.
*https://www.einfach-rente.de/ratgeber-rente/so-funktioniert-das-deutsche-rentensystem-drei-saeulen-modell (as at 24.11.2024, 9:24 a.m.)
1.1.2 The three pillars of retirement provision: statutory, occupational, private
The need to make company or private provisions in addition to the statutory pension is nothing new. Back in the late 1970s, the pension level fell to around 60% of the last net income. The difference – then only 40 percent, today around 50 percent – is known as the pension gap. There are two ways to close this gap: occupational pension provision or state-subsidized pension products. Both options are often based on funded supplementary insurance or voluntary (additional) contributions to statutory pension insurance, which can be supplemented individually to improve financial security in old age.
1.2 Pension level, demographic change and contribution rates
The pension level in Germany has fallen in recent decades and currently stands at around 48% of average net income. Without further pension reforms, the level threatens to fall to 41.6% by 2045, according to the Federal Ministry of Labor and Social Affairs. Demographic change is the main factor behind this development: while the number of pensioners is rising continuously, the number of contributors is falling. In 1962, the ratio was 1:6, today it is only 1:1.8 – and according to forecasts, this ratio will deteriorate further to 1:1.3 by 2050.
Such a change naturally places a considerable burden on the pension system and requires urgent adjustments to ensure long-term financial viability. In order to stabilize the pension funds, contribution rates must therefore be regularly adjusted (upwards). The contribution rate for statutory pension insurance is currently around 18.6%. In the base scenario, however, this is likely to rise to up to 23.7% by 2040.
1.3 Perspective
In view of the looming pension gap and demographic change, there have recently been various reform proposals and approaches to stabilizing the pension system:
- Increasing contribution rates
- Raising the retirement age
- Introduction of a minimum pension (roughly at the basic security level)
- Tax incentives for private provision and greater personal responsibility on the part of citizens
- Introduction of flexible transitions into retirement (for example through the partial pension model)
- Pension payments should be increasingly funded from tax revenue (to relieve the burden on contributors)
Our personal tip for you:
“Make private pension provision early on to close any gaps. In particular, tax-subsidized capital market investments in an insurance wrapper offer an attractive way to make long-term provisions for retirement. With providers such as Estably in Liechtenstein, you can benefit from effective investment strategies and secure your financial future. Find out more from us!”
Estably Asset Management Ltd
Schaanerstrasse 29
9490 Vaduz
Liechtenstein
Curious about personalised advice and tailor-made strategies for your individual situation? Get your free and non-binding initial consultation with us now!
2 What was Pension Package II and what was at stake?
The new pension reform was considered to be one of the most ambitious projects of the traffic light coalition, which was intended to stabilize and modernize pension provision in Germany in the long term. However, the plans fell through when Finance Minister Christian Lindner surprisingly set new budget priorities with his “Economic Turnaround Germany” paper. Austerity measures for social benefits, climate and pensions triggered heated debates and ultimately led to the government breaking up. Lindner’s resignation and the FDP’s withdrawal from the coalition marked the end of the “traffic light” government. And with it the end of the planned pension reforms. Find out more in the following subsections about the idea behind Pension Package II, the final positions of the individual parties in the traffic light government and what happens now.
2.1 How should Pension Package II safeguard pension insurance?
Pension Package II was intended to keep the pension level stable until mid-2040. A reform was prepared in the Bundestag specifically for this purpose, which provided for contribution increases and further state subsidies (in 2023, the pension insurance scheme was already subsidized with taxpayers’ money amounting to 121.05 billion euros). From 2025, an endowment fund was also to be opened, which was to have a capital stock of 200 billion euros by the mid-2030s. From this point onwards, the income from the generational capital would have contributed an average of 10 billion euros per year to the statutory pension scheme. For the first time in its history, Germany would thus have launched a funded pension insurance scheme (at least in part).
2.2 What roles did the traffic light government and Christian Lindner play?
The coalition government was deeply divided, especially in the discussion about the second pension package. This was because the different positions of the governing parties had a decisive influence on the debate:
- Social Democratic Party of Germany (SPD): it rejected the privatization of old-age provision and called for higher state subsidies to safeguard pension levels.
- Free Democratic Party (FDP): It focused on personal responsibility and wanted to use generational capital to relieve the burden on pension funds through private investment.
- Alliance 90/The Greens: Although they supported intergenerational capital, they insisted on sustainability criteria and called for social justice.
As Finance Minister at the time, Christian Lindner bore the main responsibility for Pension Package II and its implementation. However, the profound disagreements within the traffic light coalition, in particular the fierce rejection of savings in other areas, presented him with ever greater obstacles. However, internal conflicts led to growing frustration and increasingly shrank his political room for maneuver.
2.3 What options does the Federal Government now have?
Following the failure of the traffic light coalition, a comprehensive policy change is now imminent. This is likely to have a particular impact on pension policy. For example, the CDU is planning the active pension, which allows people to continue working tax-free after reaching retirement age. At the same time, the focus is on higher deductions for early retirement and incentives to work longer. Raising the retirement age to 70 is also conceivable. As the FDP in particular favored the (partial) solution with generational capital, capital-based (and largely self-reliant, state-subsidized) retirement provision will probably not be implemented in Germany this time either.
Our personal tip for you:
“Private pension provision is more important today than ever. Irrespective of any planned pension reform, unit-linked pension insurance policies already offer tax advantages during the savings phase and enable you to effectively close the looming pension gap. Don’t rely on political reforms – take responsibility and secure your financial future yourself! Our experienced team will be happy to advise you free of charge and without obligation!”
Estably Asset Management Ltd
Schaanerstrasse 29
9490 Vaduz
Liechtenstein
Curious about personalised advice and tailor-made strategies for your individual situation? Get your free and non-binding initial consultation with us now!
3. What is the idea behind generational capital and how could it benefit you privately?
The Ampel government’s generation capital was based on the idea of the Norwegian sovereign wealth fund: a sustainable capital investment was to contribute to the long-term stabilization of pension insurance. The plan was for a state-managed fund that would have invested in broadly diversified global equity markets in order to achieve stable long-term returns. The project was designed for the long term and aimed less to benefit current pensioners and more to ease the financial burden on future generations. With a target capital of 200 billion euros by the mid-2030s, the fund’s earnings were to contribute around 10 billion euros a year to the statutory pension scheme. This would reduce dependence on taxpayers’ money and modernize part of the funded pension system.
Even if the generational capital is unlikely to materialize: The approach behind it can be perfectly applied to your own pension provision! By investing regularly in the stock markets at an early stage, you can create your own personal generational capital. This allows you to benefit from long-term returns, secure financial independence in old age and free yourself from the uncertainties of state pension policy.
4 What can you do yourself for your individual retirement provision?
Now more than ever, personal initiative is required when it comes to individual retirement provision. In this respect, Germans are a nation of savers: 41 percent of all Germans save in their current accounts and 35 percent in other low-interest demand deposits. As an asset manager with many years of experience based in Liechtenstein, the Estably team recommends the following three (private) pillars for your individual retirement provision:
- Invest cash and cash reserves in high-interest overnight and fixed-term deposit accounts at the Liechtensteinische Landesbank (LLB)
- Add gold as protection against inflation
- Invest the majority in broadly diversified, high-performing and tax-advantaged equity investments in an insurance wrapper
Finally, find out how you can optimize your private pension provision with the support of Estably from Liechtenstein in order to be financially well prepared for the future.
4.1 Saving with attractive overnight and fixed-term deposit interest rates
Secure up to 2.65 percent overnight and fixed-term deposit interest for your savings and sight deposits in one of the safest banking centers in the world and receive interest rates that are above the current inflation rate in Germany (as of 2024: 2.00 percent). This is because your call money and fixed-term deposits are invested with the LLB in the Principality of Liechtenstein via our Estably asset management agreement. Deposit protection in Liechtenstein guarantees you 100,000 euros per customer in the event of bankruptcy.
4.2 Buy gold as inflation protection and store it safely
Storing gold in Liechtenstein is another ideal addition to your private pension provision. Thanks to the Principality’s political stability and economic security, you benefit from maximum protection against government intervention and economic risks. As a crisis-proof investment, gold secures your assets in the long term, while storage at the LLB guarantees maximum security and easy availability. Take advantage of this exclusive opportunity to effectively diversify and sustainably secure your retirement provision.
4.3 Investing in high-performance strategies
However, the main focus of your private pension provision should be on unit-linked pension insurance. With Estably, you can therefore also make tax-optimized private provisions for old age and build up long-term assets. Starting with a minimum investment of EUR 100,000, you invest in a high-performance strategy that invests in carefully selected individual shares in accordance with the successful value investing principles:
- Modern Value 80 (80 percent equities, 20 percent bonds)
Our fees are transparent and consist of a management fee of 1.19 percent p.a. plus 0.30 percent bank charges and a performance fee of 10 percent on profits. Thanks to the tax-free accumulation phase and reduced taxation in the payout phase, you benefit from maximum efficiency. The high-yield investment strategy has achieved first-class results since its launch in 2016, as proven by independent performance tests. Take advantage of these benefits to structure your retirement provision individually and sustainably – securely held at St. Galler Kantonalbank in Switzerland.
So how exactly does it all work, and what advantages does it offer?
- One-off payment or monthly savings installments: You have the choice of either making a one-off payment or paying regular monthly savings installments to build up your assets for retirement.
- Savings phase: During the savings phase, you benefit from a tax-free growth rate on your investments. Your money grows exponentially due to the compound interest effect, without taxes being levied on gains.
- Tax-free payout: From the age of 62 and after an investment period of at least 12 years, only half of the profit is taxed – this significantly reduces your tax burden! Example: With a profit of 200,000 euros and a personal tax rate of 30 percent, you only pay 15 percent tax on the profit, which results in a saving of 20,000 euros.
- Flexible payout options: You decide whether you want your saved capital paid out in a single payment or monthly.
- Digital overview: You can access your investment data at any time via app, make additional payments and track performance.
Our personal tip for you:
“Focus your retirement provision on unit-linked pension insurance, together with Estably. Your contributions are invested in a tax-optimized manner in high-performance strategies that can generate high returns in the long term. Thanks to tax advantages and professional management, this is one of the most efficient ways to look to the future with financial security. Let our experts show you now in a free consultation how you can individually optimize your retirement provision!”
Estably Asset Management Ltd
Schaanerstrasse 29
9490 Vaduz
Liechtenstein
Curious about personalised advice and tailor-made strategies for your individual situation? Get your free and non-binding initial consultation with us now!
5 Conclusion: The future of retirement provision is in your hands and we are happy to support you in this process
Let us advise you on the topics of finance, asset management, capital investment and much more!
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About Estably
Estably is the first digital asset management company from Liechtenstein to offer first-class wealth management through a blend of technology and human investment expertise. Thanks to the portfolio managers’ many years of experience in the field of value investing, the aim is to achieve above-average returns. The aim is to make professional asset management, which was previously exclusively available to major investors, accessible to everyone – conveniently, transparently and profitably.
