Pensions in Germany
Pensions in Germany are based on a “three pillar system”.
Mandatory State Pension Provision
The scheme is based on the Pay as you go (or redistributive) model. Funds paid in by contributors (employees and employers) are not saved (or invested) but are used to pay current pension obligations.
Civil servants in Germany do not pay any contributions themselves but their salaries are correspondingly lower than the private sector.
Recent changes to the system mean that from 2012 to 2023 the retirement age will be increased by one month per year reaching 66 in 2023. From 2023 the retirement age will be increased yearly by 2 months to reach 67 in 2029. Each missing year results in a 3.6% reduction in the pension entitlement.
The state scheme is financed by a payroll tax of 19%. Half the tax is paid by the employee and half by the employer.
Voluntary Occupational Pension Provision
The Voluntary Occupational Pension schemes (Betriebliche Altersvorsorge) were created under the Company Pensions Law (Betriebsrentengesetz) in 1974 and are a benefit granted by a company to its employees. Voluntary schemes can fall into different categories: Defined benefit (Leistungszusage) Defined Contribution (Beitragsorientierte Leistungszusage) Contribution with minimum benefit The schemes can be structured in various ways: Direct Grant (Direktzusage) Support Fund (Unterstützungskasse) Pension Company (Pensionskasse) Direct Insurance (Direktversicherung) Pension Fund (Pensionsfonds)
In 2009 contributions up to 2500€ (Betriebsbemessungsgrenze) were tax free. A further 1800€ in contributions to Direct Insurance schemes are tax free. About 50% of workers in Germany are covered by these schemes.
Private pension schemes in Germany are personal funded pensions. The funds are protected by law and cannot be seized by creditors or the state. They are also not inheritable. Payments into the funds benefit from a tax credit of 154€ per year per adult and up to an additional 300€ if the fund beneficiary has children. The most popular form of private pension provision is the so-called Riester-Pension. The annual cost to the state of the tax credits is 7 Bn€.
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