Germany Overhauls Pension System

Substantial Increase in Disability Pensions

Germany’s pension system has seen significant changes over the past decade, with one of the most notable developments being the sharp rise in disability pension payments. Figures from the German Pension Insurance (Deutsche Rentenversicherung) show that the average monthly payment for new disability pension recipients rose from €678 in 2013 to €1,176 in 2024. This 73 percent increase far outpaces the growth in regular old-age pensions during the same period.

This shift is largely due to a series of reforms that expanded the so-called “Zurechnungszeit,” a calculation mechanism that simulates continued employment for those who become unable to work due to illness or disability. Since 2014, this simulated work period has been extended several times, allowing individuals to receive benefits as if they had continued working at their previous income level until reaching retirement age.

Moreover, income losses in the final years before becoming disabled are no longer counted negatively in the pension calculation. These changes have significantly reduced the risk of poverty among disabled pensioners, a group that was previously among the most financially vulnerable.

New Compensation for Past Pensioners

While previous reforms benefited only new recipients, a recent law introduced in July 2024 aims to support those who retired between 2001 and 2018. These individuals, along with their survivors receiving follow-up pensions such as old-age or widow’s benefits, now receive a flat-rate supplement. The amount is either 7.5 or 4.5 percent, depending on the year of initial retirement, and is currently paid separately from the regular pension.

Starting in December 2025, this flat-rate model will be replaced by a personalized supplement based on each retiree’s individual contribution record. The additional amount will then be combined with the monthly pension into one payment.

According to internal estimates, the disability pension reforms introduced since 2014 have cost the pension fund at least €11 billion. As of the end of 2024, disability pensions accounted for 1.7 million out of a total of 26 million pensions, with the system paying out €344.5 billion in total benefits.

A New Direction from the Labor Ministry

Federal Labor Minister Bärbel Bas has now presented a broader pension reform package to the government. Her proposal includes three central components: maintaining the current pension level, enabling more flexible employment for retirees, and extending parental pension benefits.

The most prominent feature is the commitment to keeping the statutory pension level at 48 percent of the average wage until at least 2031. This ensures that pensions will rise in line with wages, maintaining purchasing power for retirees. This commitment fulfills a major election promise and is seen by Bas as a measure of social fairness, giving people confidence that their lifelong contributions will result in a stable retirement income.

End of Employment Restrictions for Pensioners

The reform package also seeks to remove a long-standing barrier for retirees who wish to return to work. Currently, the law prohibits employers from rehiring retired employees on fixed-term contracts unless a specific legal reason exists. This “re-employment ban” has often made it difficult for employers to retain experienced workers who wish to continue working after reaching retirement age.

Under the new rules, companies will be able to rehire pensioners on temporary contracts without providing justification. This is expected to benefit industries facing labor shortages, such as retail, care services, and skilled trades. Many companies have already employed retired professionals informally, valuing their expertise and the mentoring they provide to younger staff. The new legislation would make such arrangements legally easier and more transparent.

Expanded Parental Pension Benefits Delayed Until 2028

A further reform targets parents—particularly mothers—who raised children before 1992. Currently, their pension entitlements are lower than those who had children afterward. The new law extends the credited child-rearing period from two and a half to three years, matching the benefit given to parents of children born after 1992. However, the adjustment will not take effect until 2028 due to technical limitations in processing by the pension system.

The delay has sparked criticism from advocacy groups, but the government argues that implementation requires at least two years of preparation. Once in force, the adjustment is expected to affect hundreds of thousands of retirees, improving their monthly income and addressing a longstanding inequality.

Federal Budget Impact and Long-Term Planning

The pension reforms are projected to significantly increase federal spending. According to the legislative draft, the additional funding required will rise to approximately €14.9 billion in 2030 and could reach €20 billion annually by 2040. These amounts are to be covered through tax revenues, ensuring that the contribution rates for current workers remain stable.

To monitor the sustainability of these measures, the government plans to issue a detailed report in 2029. This report will assess the impact of the reforms on contribution rates, federal subsidies, and long-term viability of the pension system beyond 2031.

The federal representation body of the pension system, consisting of equal parts employee and employer delegates, has backed the reforms. Uwe Hildebrandt, co-chair for the employee side, emphasized the importance of correcting past imbalances. He highlighted that people retiring due to disability often face much greater financial hardship, and the new measures are a significant step toward equitable treatment.

Balancing Equity and Affordability

With an aging population and increasing life expectancy, Germany’s pension system faces structural challenges. The latest round of reforms attempts to balance fiscal responsibility with social justice. While the cost to the federal budget is high, the improvements in pension security and the reduction in inequality are seen as necessary investments in the country’s social fabric.

As the reforms progress through parliamentary review and implementation stages, the debate over future pension levels, retirement age, and intergenerational fairness will likely intensify. Still, the current package represents one of the most comprehensive overhauls of the German pension system in over a decade.