The German Retirement and Pension System - Basic Facts
Updated - January 2015
Ever since Germany established its first Social Security system in 1889, the public retirement insurance has been "pay-as-you-go", with the current pensions of the retired paid from the current premiums of the not yet retired. Currently about 85% of the work force is enrolled in the Public Retirement Insurance (gesetzliche Rentenversicherung GRV). Civil Servants, who make up about 9% of the work force, have their own pension system and the self-employed, who make up about 9% of the work force, are mostly self-insured (but are allowed to participate in the GRV.) The system is now under strain because of an aging population, reunification, unemployment, economic conditions, early retirement and other factors.
Revenues from the premiums don't fully cover the cost of the pensions, which is why the government enacted pension reform in 2001 and 2004. With these reforms, public retirement insurance premiums will be increased, pensions slightly decreased and the retirement age increased. Most importantly, for the first time in Germany, employers and employees will be encouraged to invest in private pension plans through subsidies and tax breaks.
There are three pillars to the German retirement system; 1) the government-run Retirement Insurance system, 2) private company plans and 3) private individual retirement investments.
The Public Retirement Insurance System, which also includes survivor and disability benefits, has been dominant. Participation is mandatory for employees, with each worker assessed for a sum based on annual earnings. Premiums are deducted by the employer, with the employee paying half and the employer half. In 2015 the premium is 18.7 percent of the gross monthly wage or salary. This is assessed on monthly incomes up to a maximum of 6,050 euros (72,600 euros a year) in the west and 5,200 euros (62,400 euros a year) in the east. Retirement now normally begins at age 65, though it is to be gradually increased to 67. Contributions to the plan are also to be increased, and maximum pensions eventually reduced from 70% to 67% of net pay. English language information about the German Public Retirement System can be found at www.deutsche-rentenversicherung-bund.de. (Click on "International" on the top right of the page.)
Company Plans (bAV betriebliche Altersvorsorge) have traditionally been designed to supplement Retirement Insurance, and now will play a greater role in taking up the slack. Government tax breaks and subsidies will encourage companies and employees to invest in private plans. Though company plans are not compulsory, they cover about three-fifths of the working population, a percentage that is expected to grow. Pensions on company plans usually also commence at age 65, though this is likely in many cases to follow the Retirement Insurance practice and increase gradually to 67.
The third pillar, individual retirement investments, have not been very significant up to now, but have recently been getting a lot of attention as supplements to the Public Retirement Insurance. These private plans include (but are not limited to) the Riester and Rürup plans. Workers and other participants can get certain tax advantages and benefits from government subsidies for these plans. The benefits and other details vary from plan to plan. There are differing payment methods, payout schemes, tax liabilities, portability opportunities and other factors that distinguish these plans from each other. Certain plans may be better for different individuals depending on their particular situation.
Expatriates living in Germany can participate in all these plans. It may be possible to pay premiums to, and get benefits from, private pension plans even after having left Germany. Benefits from company plans usually can be received outside of Germany, though premiums are not always refunded. If an expat qualifies for a pension under the Public Retirement Insurance it can be paid to them even if they do not live in Germany. Laws and regulations may vary from country to country regarding collecting a pension from Germany or any other country. You should check with the pension authorities in your country of residence to see if a German pension would have any effect on any pension you may have earned in that country.
There are many complicated details to the pension system; means of determining the amount of pensions, provisions for early retirement, increased retirement benefits for staying on the job beyond 65, etc. The best way to find what plan is right for you is to consult a financial advisor.