The German Old Age Security System in 2020

By Simone M. Schneider, Max Planck Institute for Social Law and Social Policy

The German old age pension insurance system dates back to the Disability and Old Age Insurance Act of 1889. With the pension reform of 1957, the system was fundamentally reformed in order to provide ‘standard protection’ against financial risks in old age for a majority of the German workforce; private and occupational pension plans remained largely a private matter. Since 2001, and in response to severe financial pressures, the institutional landscape of the German old age pension system has changed profoundly and with it the intended pathways to achieve ‘standard protection’ in old age. On the one hand, legal measures were introduced that lowered the guaranteed pension benefit level of the statutory old age pension scheme. On the other hand, new regulations for occupational pensions were introduced and private, state-subsidised pension schemes were created. Although participation is still voluntary, supplementary pension schemes can no longer be perceived as simple ‘top-ups’ to public pensions; rather, they serve as ‘substitutes’ compensating deficits of a weakened public system. As of now, the legislator intends to provide ‘standard protection’ against financial risks in old age by an interplay of mandatory insurance in public pension schemes and (mostly) voluntary private investment in fully funded occupational or private schemes that are incentivised by state allowances and/or reductions of taxes and social security contributions. Other supplementary private pension plans may ‘top up’ pension benefits if used in conjunction with other forms of ‘standard protection’. The guarantee of a ‘minimum’ subsistence level for elderly persons is not a principal function of the German old age pension system, but was attained through special social assistance measures.

Standard Protection in Old Age

The statutory old age pension scheme (Gesetzliche Rentenversicherung)  is by far the largest public scheme in which the majority of the German workforce is mandatorily insured. It is a pay-as-you-go (PAYG)-financed insurance scheme with benefits being linked to contributions paid throughout a person's career. Specific public pension schemes exist for distinct occupational groups who are excluded from mandatory insurance in the statutory old age pension scheme. The civil servants’ old age pension scheme (Beamtenversorgung) provides privileged treatment for civil servants, judges and soldiers. It is fully tax-financed, paid out of the general budget and commonly provides a high level of financial protection in old age, granting benefits based on earnings received at the end of a person’s career. Entrepreneurs and their families who work in the agricultural sector can only expect partial financial protection in old age from mandatory insurance in the heavily subsidised farmers’ old age security scheme (Landwirtschaftliche Altersvorsorge) with fixed (flat-rate) contributions. Financial protection for persons working in the liberal professions is organised within more than 90 autonomous and mostly fully funded old age pension schemes for the liberal professions (berufsständische Versorgungswerke). Due to their specific financing mechanisms, benefits tend to be higher compared to the statutory old age pension scheme. Persons not subject to mandatory insurance can join the statutory old age pension scheme on a voluntary basis.

State-regulated occupational pension schemes (betriebliche Altersvorsorge) are (mostly) fully funded and provided by the employer. In general, participation of employees is voluntary with the exception of specific supplementary pension schemes that are mandatory for particular occupational groups such as the supplementary pension schemes for public service employees (Zusatzversorgung des öffentlichen Dienstes). Commonly, the choice of the organisational form of pension plans depends on agreements, often at company level, or is based on collective agreements. Pension plans are either implemented internally via the employer in the form of book reserves (Direktzusage)  and support funds (Unterstützungskasse),  or externally in the form of direct insurance (Direktversicherung; i.e. life insurance held by an employer on behalf of employees), a pension institution (Pensionskasse; i.e. a special type of life insurance company), or pension funds (Pensionsfonds). If not agreed otherwise, all employees are legally entitled to pay part of their income into a company’s pension plan (i.e. deferred compensation) in the form of a direct insurance, for which reductions of taxes and social security contributions are granted.

With the introduction of the Riester pension (Riester-Rente) in 2002, the state created a voluntary but state-subsidised, fully funded private pension scheme (private Altersvorsorge) accessible for persons mandatorily insured in a public pension scheme and their spouses (with the exception of the liberal professions). The state supports participation in the scheme by granting state allowances and extra tax refunds on contributions paid into certified/approved pension plans. Options of private pension plans are various, and range from bank savings plans, private pension insurance or investment fund savings plans, to combined savings and loan plans for owner-occupied residential property. Under certain conditions, employees participating in an externally implemented occupational pension plan can decide to participate in the Riester pension and benefit from its state subsidies.

Top-Ups

In 2005, the state created another voluntary, fully funded private pension scheme, the so-called  Rürup pension (Basisrente). The state supports participation in the scheme via tax deductions for certified/approved pension plans. The scheme was originally designed for the self-employed who are not mandatorily insured in public pension schemes and therefore without access to the Riester pension; however, all individuals with taxable income who reside in Germany can access the Rürup scheme. The Rürup pension serves as a ‘top-up’ to public pension benefits for persons who are covered by other forms of ‘standard protection’ in old age, in particular high earners. In addition, a range of more flexible, privately funded pension plans exist (e.g. in the form of life insurances) that can be used in conjunction with other pension schemes to top up pension benefits.

Minimum

To guarantee a basic subsistence level for elderly persons with insufficient financial means, a basic income support scheme in old age (Grundsicherung im Alter)  was introduced in 2003. The scheme explicitly targets poverty alleviation among elderly persons and is financed out of the general federal budget. The scheme is means-tested but differs from general social assistance measures. For example, no maintenance claims against children and parents with an annual income of less than EUR 100,000 are made. Income and assets of spouses, cohabiting civil partners and similar unions are considered, whereas certain personal income, such as parts of supplementary pension payments, and specified assets, such as self-used property/housing, are exempted from means testing. The scheme is legally independent of the statutory old age pension scheme, but forms part of social assistance in Germany.