German pension reform commission proposes broad overhaul including higher retirement age link and new funded pillar

The proposals from the commission, known as the Rentenkommission, were expected to be formally handed to Chancellor Friedrich Merz and Labour Minister Bärbel Bas later this month, but details were leaked to German media over the weekend, including the Handelsblatt and public broadcasters.

The leak comes as the coalition government pushes to finalise a broader reform package before the summer recess, with pensions among the most politically sensitive elements. Officials had kept the commission’s work largely confidential for months, with members meeting regularly over a five-month period to design what they describe as a long-term stabilisation of the system.

According to reports from the ARD capital studio, the commission developed around 30 recommendations, aiming to secure pension financing in the context of Germany’s ageing population and shrinking workforce. A central idea is to widen the base of contributors to the statutory system by gradually including self-employed workers, civil servants and members of parliament. In many cases, this would apply only to new entrants, with transitional arrangements expected for existing groups.

Another major pillar is the introduction of a compulsory, capital-funded supplementary pension modelled partly on the Swedish system. Contributions from employees and employers would be channelled into a state-managed fund, intended to complement the current pay-as-you-go structure. The commission reportedly envisions a contribution starting at around 0.5 per cent of wages, later rising to about 2 per cent.

To offset the initial lack of returns from such a fund, the state would temporarily step in with budget resources, ensuring that overall pension levels are maintained during the transition phase. Longer term, proponents argue the model could stabilise benefits and reduce pressure on the traditional system.

The proposals also include adjusting the statutory retirement age in line with life expectancy. Under the concept discussed, younger cohorts could see the retirement age gradually increase, with one scenario suggesting an additional half year every decade from the early 2040s. The commission is also examining a target ratio between working years and retirement years of roughly two to one, effectively tying the length of working life to demographic trends.

At the same time, the commission is suggesting more flexibility in early retirement rules, with access potentially linked less to contribution years and more to health status, reflecting disparities in life expectancy between different occupational groups.

Economists broadly acknowledge the direction of the reforms but warn they do not go far enough. Veronika Veronika Grimm criticised earlier government decisions, arguing they have already pushed the pension system in the wrong direction, particularly through the expansion of so-called “Mütterrente” benefits and the decision to stabilise the pension replacement rate at 48 per cent until 2031.

That 48 per cent level — the ratio between a standard pension and average wages — has become a key political anchor. Critics argue it effectively locks in higher long-term costs. Bernd Bernd Raffelhüschen has called such guarantees “unfunded and unfair to younger generations,” warning of rising contribution burdens over time.

Employer representatives have echoed concerns. The German Employers’ Association BDA has warned that contribution rates could climb toward 20 per cent or higher in the coming years if current policy choices persist, increasing labour costs and reducing net wages.

Within the coalition, however, political pressure remains high to maintain pension stability ahead of upcoming electoral cycles. The government bloc led by Merz’s CDU and the Social Democrats insists that the 48 per cent threshold must be preserved for now, with financing partly shifted to the federal budget.

The IW has also cautioned that relying on growth and higher employment alone to finance the system may prove unrealistic, warning of potential fiscal strain if demographic trends continue unchecked.

Beyond pensions, the debate has also revived broader questions about labour market participation, retirement incentives and the sustainability of Germany’s social insurance model. Public broadcaster ARD reported that almost one in three workers currently retire early with deductions, adding further pressure to the system.

The commission’s proposals are expected to be formally presented to the government in the coming days, setting the stage for a political negotiation that could define the future shape of Germany’s pension system well into the next decades.