Non-final working translation

Germany’s government finances are on an expansionary course. The deficit is set to rise, mainly on account of steep expenditure growth. According to the Bundesbank’s June forecast, 2 the deficit ratio will grow to around 5 % by 2028 and the debt ratio will rise to roughly 70 % (2025: 2.8 % and 63.5 %, respectively 3 ). Higher defence expenditure is the main contributor to this, but non-military investment expenditure, tax cuts and additional transfers (for example, for lower electricity grid fees or higher mothers’ pensions) will also play a role. Interest burdens will rise significantly too, mainly owing to higher interest rates. Furthermore, strong growth in social security expenditure will have a temporary expansionary effect. Various cost-saving measures are set to be implemented in the health insurance scheme, starting in 2027. 4 The contribution rates of the long-term care insurance scheme and the pension insurance scheme will rise from 2027 and 2028, respectively. At the Federal Employment Agency, labour market-related expenditure is “breathing” in time with the economic cycle: it is currently rising sharply, and will fall again as the economy recovers.

The fiscal outlook up to 2028 has not changed significantly since the June forecast. Although the planned pension reform is likely to significantly ease the burden on central government finances in the longer term, it would initially entail increasing additional burdens from 2028 onwards (see Chapter 6). The new central government plans include extensive consolidation, but this has only been fleshed out to a limited extent (see Chapter 3.2). Substantial action is thus still required here in order to ensure compliance with the debt brake from 2028 onwards and to avoid a potential conflict with the EU rules. 

The fiscal rules for central and general government currently afford considerable leeway. The Federal Government also interprets the rules very broadly. The national rules allow for extensive borrowing via the sectoral exemption for defence spending and the Infrastructure and Climate Neutrality Fund. However, these special loans do not only finance growth in the areas of defence, infrastructure and climate action. They also close budget gaps or finance other measures. 5 Overall, central government is taking greater advantage of discretionary scope (see Chapter 3.2). The EU rules currently also allow Germany considerable leeway. Germany has activated the EU exemption for defence spending. In addition, it interpreted the regular leeway generously in its fiscal-structural plan of last August. 6  

Nonetheless, public finances may potentially stand in conflict with the broad fiscal requirements in various areas. 

Effective fiscal rules are not an end in themselves, but safeguard resilient public finances and thus also a stability-oriented monetary union. By international standards, Germany still has a relatively low debt ratio, and it continues to have the best possible rating in the capital markets. In view of this, temporarily increasing net borrowing in order to finance urgent, extensive additional needs for defence and infrastructure seems reasonable. However, under the current plans, there is a risk that the deficit ratio will exceed 4 % not only in the short term, but permanently. Should this be the case, the debt ratio will rise above 100 % in the long term, interest burdens will grow strongly and scope for fiscal action will be reduced. Such a development also runs counter to EU rules and jeopardises the resilience of public finances. 

Germany is facing major fiscal policy challenges. A number of important and extensive structural reforms are under way and will be a welcome development. What matters now is that the various reforms are implemented swiftly. The quicker the reform measures enter into force, the sooner they can improve growth conditions and ease the burden on government finances and the social welfare system. Sound public finances, reliable social welfare systems and efficient administration support positive economic development. 

Germany should provide credible prospects that deficit and debt ratios will fall again. The EU rules also envisage a return to course by the next decade at the latest – and thus impose tighter requirements than the extended debt brake. For central government, this means using concrete measures to resolve outstanding consolidation needs in its plans and to begin reducing the deficit at the end of the planning period. 

Debt brake reform is crucial if stable guardrails are to be put in place for Germany’s government finances once again. A debt brake reform is the Federal Government’s objective, in line with the coalition agreement; it has tasked a commission with drawing up recommendations. The commission’s report is not yet available, however. In November 2025, the Bundesbank submitted its own reform proposal. 12 According to this proposal, the sectoral exemption should be phased out gradually starting in 2030. In addition, the proposal re-embeds the key objectives of the EU treaties and fiscal rules into national borrowing limits. Furthermore, it cements scope for borrowing to fund infrastructure investment, but ties this more tightly to proof of additional expenditure. It ultimately falls to policymakers to lay down the basic principles of a reform and to enshrine them in the Basic Law (Grundgesetz). 

Tax revenue could see somewhat weaker growth this year than expected in the last tax estimate. Up to the middle of the year, the growth rate lagged 0.8 % below the estimated rate for the year as a whole (1.2 %). 13 The estimate could also be undershot for the year as a whole. Economic developments over the remainder of the year, not least, will be a decisive factor here. That being said, the picture differs between individual taxes.

The Federal Government intends to change income tax rates and incentives. It is also planning to increase income tax allowances and child benefits. These are set to increase in 2027 and 2028. In 2027, the government intends to raise employees’ standard allowance for income-related expenses. In addition, it is planning to impose higher tax rates on very high taxable income (top-income tax bracket: “Reichensteuer”) and a higher flat tax rate for mini jobs. 14 In doing so, it intends to partially offset the revenue shortfalls arising from the aforementioned measures. The government is planning both limits for and increases in tax subsidies. On the one hand, it wants to reduce income tax relief for spending on measures involving renovating, maintaining and modernising occupied housing by one-quarter. However, it also wants to considerably expand the tax exemption for supplementary pay for work on Sundays and public holidays. 15  

Tax shortfalls from the package of measures are relatively small. This limits the need for additional action in the government budgets, which already have large deficits. Annual shortfalls are likely to reach mid-single-digit billions in net terms.

Reducing special tax rules and incentives could create room for manoeuvre in government budgets and simplify the tax system. With fewer special rules and subsidies, the tax system would be simpler and more transparent. Bureaucracy costs could fall. The planned decrease in the tax reduction for tradespeople’s services will result in additional tax revenue of less than €1 billion. It will not simplify tax law. The revenue shortfalls resulting from the planned changes to supplementary pay could have a greater impact over the medium term. They are likely to make tax practices more complicated. This is because it is becoming more attractive to restructure income components and relocate them to areas that could benefit from this. Overall, there is much to be said for approaching the reduction of subsidies as comprehensively as possible. A broad approach covering all types of tax is recommended. 16 Additional revenue could then be used to lower tax rates or consolidate government budgets. 

The central government deficit (core and off-budget entities 17 ) will grow very substantially this year. However, it is likely to remain below the planned figure of €191 billion. The core budget could match the planned deficit of €98 billion, though (see also Table 5.3, items 1 and 3, for more information). Potentially weaker than planned tax revenue growth is expected to be compensated for by lower expenditure. As in previous years, lower expenditure could be on the cards for investment grants and military procurement, in particular. In the case of personnel expenditure, it is likely that less will be spent than planned on implementing the Federal Constitutional Court’s requirements for minimum civil servant pay this year. By contrast, loans to compensate for the Federal Employment Agency’s deficit will probably be higher than projected.

The off-budget entities’ deficit (Table 5.3, items 4 to 9) will rise very sharply in 2026 relative to the previous year. This is mainly due to expenditure by the Infrastructure and Climate Neutrality Fund. 18  The deficit of the Infrastructure and Climate Neutrality Fund is likely to rise significantly in the second half of the year compared with the previous year. 19 This is due, not least, to the fact that state and local governments will increasingly draw on funds. 

Relative to the planned figures, however, the off-budget entities’ deficit increase will probably be lower as expenditure undershoots estimates once again. For the Armed Forces Fund and the Climate Fund, outflows in relation to the target were subdued in the first half of the year. Here, the deficits for the year as a whole are likely to be smaller than planned. In the case of the Infrastructure and Climate Neutrality Fund, outflows from the state government share could be higher. In particular, local governments could apply for more funds to alleviate their budgetary strain. However, reduced spending on central government projects by the Infrastructure and Climate Neutrality Fund could more than compensate for that. 

Looking ahead to 2027, the Federal Government is reckoning with further significant growth in central government’s overall deficit, planning for it to reach a total of €211 billion (item 1). It will use discretionary scope and reserves to comply with the debt brake. The core budget is the main factor driving the rising deficit: revenue (item 40) is barely growing but expenditure (item 30) is climbing sharply. The increase in expenditure is predominantly attributable to the sectoral exemption for defence spending (item 23). In order to comply with the debt brake, the government is factoring in a variety of consolidation measures – some of which are yet to be fleshed out or are still awaiting adoption by legislators – as well as drawing on discretionary scope for configuring the budget and utilising €7 billion from the remaining reserves (item 12). 

The high central government deficit is expected to stay more or less steady in the period until 2030. Meanwhile, the structural deficit (item 10) will keep climbing due to central government's increasing use of the exemption for defence spending. Cyclical burdens and net acquisition of financial assets (items 16 and 17) will decline, which will curb the unadjusted deficit. 20  The structural deficit is being pushed upwards by the defence sector. It is set to rise from 3½ % of GDP to 4¼ % in the period between 2026 and 2030. According to budgetary planning, just over 0.3 percentage point of this will come from the standard limit under the debt brake in 2030. A further 2.9 percentage points will be provided by the exemption for defence spending. And 1 percentage point will stem from the Infrastructure and Climate Neutrality Fund.

However, there is still much to be done if the government wishes to achieve the goals enshrined in the fiscal plans and thus to comply with the debt brake. Compliance with the 0.35 % structural borrowing limit is achieved only because outstanding need for action in the core budget has already been factored into the plans, reducing the deficit. That need for action will rise to 1 % of GDP (€48 billion) in 2030, the final year of the planning period (item 39). Unless this can be generated through consolidation measures, the structural deficit will grow as large as slightly more than 5 % in 2030. 

The very considerable need for action in 2030 is due to structural tax revenue growing at a much slower pace than grants to the pension insurance scheme and interest expenditure. In the fiscal plan for the core budget (running from 2028 to 2030), structural tax revenue is valued as rising by an average of 2½ % per year. 21 That is only just enough to cover the planned sharp increase in grants to the pension insurance scheme (item 37). This increase is due, not least, to the substantial rise in the contribution rate which 2028 will bring, as central government grants are tightly linked to that. At the same time, the grants from central government are being driven higher by the effect of additional expenditure stemming from the latest pension reform (higher mothers’ pensions, extended guaranteed threshold for pension level). In addition, annual interest expenditure is expected to increase by just under €40 billion (item 36). This is mainly because average interest rates are on the rise. The mounting debt level (item 44) is also having a significant impact, though. The reserve will ease the burden on the budget by €7 billion in 2027, thus bridging the need for action already existing that year. The remaining reserves are to be used up in 2028. Looking at other expenditure that falls under the debt brake, virtually no growth is projected even without deducting the need for action.

The need for action would be significantly higher still if central government had not made use of discretionary scope. For example, in its plans, it incorporates further non-specific budgetary relief (global item beyond the need for action) or leaves foreseeable budgetary burdens out of the picture. In addition, the new scope for borrowing will be used not only to finance additional investment and defence expenditure, but also other elements from the core budget. Specifically:

Central government is facing major fiscal policy challenges. The current plans contain large deficits and additional need for action. On top of this, the plans incorporate the additional configuration choices outlined above. Central government would be well advised to focus the expanded borrowing options for infrastructure and defence more tightly on actual additional expenditure in these areas. Against this backdrop, central government has no fiscal leeway to co-finance further tasks at other levels of government. Rather, there is extensive consolidation work to be done. In order to bring the high deficits down reliably, it is advisable to tighten the debt brake (see Chapter 1.3).

Although the state government budget situation as a whole could deteriorate somewhat in 2026, it is likely to remain sound. 29  State governments closed 2025 with broadly balanced budgets in structural terms, notwithstanding a significant deficit in unadjusted terms. The structural balance and the unadjusted balance could both be somewhat less favourable this year. In particular, more federal states are planning to make use of the expanded structural scope for borrowing than last year. Tax revenue growth is weak, partly because a positive one-off effect in the case of inheritance tax no longer applies. On the expenditure side, many federal states are likely to significantly step up transfers to their local governments. However, if they use funds from the Infrastructure and Climate Neutrality Fund to do so, it will not place a strain on state government budgets. Part of the Infrastructure and Climate Neutrality Fund is earmarked for state government investment. State governments are likely to utilise those resources to relieve some of the pressure on their budgets: they do not have to prove any additional investment in order to draw on funds.

It would make sense to use the tailwinds provided by the Infrastructure and Climate Neutrality Fund to address infrastructural weak points. To this end, it is important to invest the funds in a targeted manner, channelling them into improving infrastructure. According to the data currently available for 2026, however, fixed asset formation by state government has remained subdued. 

A number of important areas for reform call for action at the state government level, too. This includes state governments’ willingness to reform the health and long-term care insurance schemes and scaling back tax expenditures – both via the Bundesrat. The federal states bear much of the responsibility for ensuring efficient administration and cutting bureaucracy. One of the important inherent tasks of state governments is to make sure that local government finances are sound. State governments determine budgetary rules for local governments, supervise local government budgets and can even prescribe amendments to the budgets submitted. At the same time, state governments are required to ensure that their local governments have adequate financial resources at their disposal. Here, they can take a much more targeted approach than central government. 

The ongoing economic slowdown will see the Federal Employment Agency’s deficit rise significantly this year. The Federal Employment Agency has already posted a deficit of €5 billion in the first half of the year (compared with €3 billion in the previous year). 30  Payments for unemployment benefits are a driving factor. As things currently stand, the deficit could reach around €7 billion for the year as a whole.

Central government is plugging the Federal Employment Agency’s financing gap with loans in order to stabilise the contribution rate. The Federal Employment Agency had used up all of its spare reserves over the course of 2025. Central government bridged the shortfall with a €1½ billion loan. This year, the Federal Employment Agency is likely to require a larger loan than central government was planning (€4 billion). By contrast, the €5 billion envisaged for next year in the central government’s draft budget could suffice. By granting these multi-year loans, central government is able to prevent the contribution rate to the unemployment insurance scheme from rising. However, the Federal Employment Agency then needs to repay the loans out of future surpluses. If the Federal Employment Agency’s deficit turns out to be partly structural in nature, 31 the Federal Employment Agency’s contribution rate would have to be raised. 

The financial situation of the statutory pension insurance scheme deteriorated significantly in 2026. The reserve is being eroded, but will subsequently provide a buffer once more. The statutory pension insurance scheme is expected to post a substantial deficit of around €11 billion in 2026 (compared with €4 billion in 2025). The first half of 2026 already saw a deficit of €4½ billion (compared with €2½ billion in 2025). The shortfall is likely to increase significantly again in the second half of the year. Revenue will continue to grow markedly (+⁠ 4 % so far), but expenditure will rise more strongly than before (+⁠ 5 %): pensions were adjusted at just over 4 % in the middle of the year, following just over 3½ % in the previous year. The number of pensions will probably grow to a similarly marked extent as seen in the first half of the year (+⁠ 0.6 %). 

Financing pressures will continue to rise over the medium term. There will then be a jump in the contribution rate in 2028. The number of pensions is likely to rise somewhat faster in the coming years. In addition, central government is going to slash its grants to the pension insurance scheme by €1 billion next year – a step forming part of its package to close its budget gap. The sustainability reserve is thus likely to reach somewhere around its statutory minimum of 0.2 times the scheme’s monthly expenditure at the end of 2027. Under the status quo, the contribution rate will then have to increase sharply from 18.6 % to almost 20 % in 2028. This is because there are practically no more funds available from the reserve and expenditure will continue to grow more strongly than the contribution base, including central government grants that are linked to it (and linked to the contribution rate as well). 

Demographic change is posing challenges to public finances and is weighing on prospects for growth. Due to rising life expectancy and the retirement of the baby boom generation, Germany’s statutory pension insurance scheme is coming under increasing pressure. At the same time, the smaller labour force is weakening potential growth and thus the economic base for social security contributions and taxes. 

The Federal Government established a commission to reform the pension system. The Pension Commission’s aim was to develop proposals for a sustainable pension scheme, thereby limiting rises in the contribution rate and ensuring that central government finances do not become overburdened. Furthermore, such a reform could make an important contribution to strengthening the macroeconomic growth outlook. The Pension Commission presented its overall concept in June 2026. 32

The overall concept put forth by the Pension Commission represents a convincing response to the financial challenges posed by demographic ageing. The Bundesbank is in favour of implementing this concept. 33 The proposed measures would strengthen employment, particularly through extended periods of employment as a result of higher age limits. At the same time, they would dampen the financing pressure on the “pay-as-you-go” system utilised by the statutory pension insurance scheme. The reform has the potential to ease the burden on contributors and the federal budget over the long term, as the pension expenditure in the pay-as-you-go system would be lower. A mandatory funded component would supplement the unfunded pay-as-you-go pension. The aim is to raise the replacement rate of the overall pension consisting of unfunded and funded components above the current overall replacement rate under the statutory pension insurance scheme in future. Through a funded pension component, the statutory pension insurance scheme would be able to take advantage of potential returns on the capital markets. In this context, the Federal Government would guarantee the current minimum replacement rate of 48 % if this is not achieved by the combination of unfunded pay-as-you-go and funded pension components. Large parts of the population would thus participate in the capital market. This would both broaden and deepen the capital market. 

To ensure that the reform package has the best possible impact, legislators should implement it as swiftly as possible. It is therefore welcome that the Federal Government is aiming to pass legislation by the end of the year. In order to mitigate the demographic burdens on public finances and the labour market, it is important to swiftly implement the changes to the age limits, in particular – not least given the large age cohorts that are close to retirement. The impact of the reform will also depend on how legislators implement its recommendations in concrete terms. Alongside the transitional periods, numerous other aspects are relevant here. 34 In this context, it is advisable that legislators be especially mindful of the aims mentioned above.

The following remarks provide assessments of selected aspects of the comprehensive reform proposals – including with regard to the statement submitted to the Pension Commission by the Bundesbank. 

The Pension Commission proposes linking age limits to life expectancy as well as abolishing early reduction-free retirement. This is welcome. This is because the changes are likely to result in longer periods of employment. Taken in isolation, this would strengthen the potential labour force and dampen the financial pressure on both the statutory pension insurance scheme and the federal budget. Accordingly, both the pension contribution rate and the central government funds granted to the statutory pension insurance scheme would be significantly lower over the long term than they would be if the age limits were left unchanged. Furthermore, the Pension Commission also recommends measures to mitigate social hardship caused by the increased age limits, in particular. 

With regard to the standard retirement age, the Pension Commission specifically recommends that it should be linked to future developments in life expectancy after 2031. Based on current legislation, the standard retirement age will rise to 67 years by 2031 for those born from 1964 onwards. No further increase is currently planned. If the standard retirement age remains unchanged, the ratio of years of employment to years of retirement will steadily decrease as life expectancy rises. The Pension Commission therefore proposes that further rises in life expectancy should be translated into additional years of employment and additional years of retirement at a ratio of two to one. This would largely stabilise the ratio.

The Pension Commission recommends that the minimum retirement age for long-term insured persons under the statutory pension insurance scheme should be raised in a timely manner and, after 2031, in the same way as the standard retirement age. This is the minimum age from which long-term insured persons can draw an early old-age pension (with reductions). At present, early retirement is possible after at least 35 years of insurance under the statutory pension insurance scheme and from a minimum age of 63 years. The proposal envisages that the minimum age will initially rise to 64 years as soon as possible. From 2032 onwards, it should rise in the same way as the standard retirement age, with the Pension Commission envisaging a gap of three years between the standard retirement age and the minimum retirement age for long-term insured persons. Given demographic change and the shortage of skilled workers, there is good reason to raise the limit quickly in this way so that there is a three-year gap between the statutory retirement age and the minimum age. For those born in 1965, the minimum age would then be 64 years.

Early reduction-free pensions after 45 years of contributions should be abolished. The Pension Commission has not set out a recommended time frame for this proposal. However, in this case too, swift implementation seems appropriate. This is because this would also likely strengthen employment and ease the burden on pension finances – especially when combined with the aforementioned change to the minimum retirement age for long-term insured persons. 35 Reduction-free pensions particularly benefit highly qualified skilled workers and men. 36 Given equal overall contributions and calculated over the entire entitlement period, those who benefit from reduction-free pensions receive higher pensions on average than other insured persons. This weakens the equivalence principle of the statutory pension insurance scheme, according to which the same contributions should result in the same pension entitlements. Abolishing early reduction-free pensions would thus ease the burden on contributors, other pensioners, and the Federal Government (as the contribution rate for the pay-as-you-go system would, taken by itself, be lower).

The Pension Commission proposes that the reductions and supplements for early and deferred retirement should be reviewed at regular intervals and calculated in accordance with actuarial principles. This is welcome. The Pension Commission wants to make early and deferred retirement as financially neutral as possible for insured persons. At present, however, it sees no urgent need to make any adjustments to the reductions or supplements.

It would make sense to agree upon a suitable, specific approach as part of the reform. The rates could subsequently be reviewed for the first time immediately afterwards. To this end, methods, assumptions and calculation methods for the rates would first need to be determined. Time frames for reviewing and adjusting the rates would then need to be set out. 

In its final report, the Pension Commission makes reference to updated calculations from the Bundesbank. 37 Based on the underlying standard assumptions used, these result in somewhat higher standardised monthly reductions for early retirement. On this basis, they could thus rise from the current 0.3 percentage point per month to 0.4 percentage point per month. By contrast, the level of supplements for deferred retirement after reaching the statutory retirement age is largely appropriate. These results are based on the current legal situation and the perspective of insured persons. 38

The Pension Commission recommends that benefits for which no contributions were paid should be categorised and quantified in a clear and comprehensible manner. Those benefits should then be financed out of central government funds. 39 There are good reasons for this approach. The rule would also apply to any new relevant benefits and to later expansions of benefits in this area. To this end, legislators would have to state which individual benefits they categorise as not being covered by contributions and then finance them out of central government funds. Under this approach, funding could be based more on objective criteria rather than on the prevailing fiscal situation, as appears to have been the case with the recent ad hoc decision to reduce central government funds in 2027. This approach would make it clear which benefits are financed out of taxes and where responsibility for financing them lies. It would furthermore make them a clear and verifiable item in the review and prioritisation of central government tasks and spending. 

The volume of central government grants 40 to the statutory pension insurance scheme is currently higher than the statutory pension insurance benefits that are not covered by contributions, where the latter are defined narrowly, but lower if those benefits are defined broadly. 41 A pragmatic approach, like the one proposed by the Social Advisory Council, would be for legislators to first define a suitable and well-reasoned catalogue of benefits that are not covered by contributions. 42 They could also be assisted in this task by a commission as required. For catalogued benefits, central government would then allocate central government funds in the amount of the (estimated) expenditure on those benefits. Once the actual expenditure outturns become known, a final set of accounts could be drawn up to balance out any estimation inaccuracies. To avoid any abrupt changes when migrating to the new system, a transitional period could be arranged during which central government funds converge towards the new level. 

The Pension Commission recommends supplementing the German statutory pension insurance scheme with a mandatory, individually managed funded pension scheme based on the Swedish model. That is a convincing proposal as well. Sweden has many years of experience in running a funded subsystem and has built on that track record to improve and refine it. This appears to be a good starting point. There would therefore need to be a good case for deviating from the Swedish blueprint.

Specifically, the Pension Commission is proposing an additional capital contribution to the statutory pension insurance scheme. That additional contribution would be used to build up the funded pension component. The contribution rate to this component would rise in four increments of ½ percentage point to 2 %, ideally between 2028 and 2031. It would enable insured persons to accumulate their own stock of retirement assets during the contribution period. As of the normal retirement age, those assets would then be converted into a life-long funded pension. Based on a 2 % contribution rate, the annual volume of savings would probably come to just under 0.7 % of GDP (2026: €30 billion). 43 The volume of financial assets built up over the long term out of the capital contributions and the funded pensions crucially depends on how the investments perform. Volumes of between 25 % and 60 % of GDP would be the outcome over the long run, given return-growth differentials of between 0 % and 4 %.

To establish a funded pension scheme of this kind, a number of design-related decisions need to be made. If the Swedish template is followed, that would mean, inter alia, that: 

For insured persons, the funded pension component provides a (mandatory) supplement to their pension provision – one that offers the prospect of relatively high returns combined with low management costs and a hedge against longevity risk. A returns-oriented investment in the capital market can be expected to generate relatively high income streams over the long run (given a higher level of risk). At the same time, the bulk design enables costs to be kept low – in Sweden, management costs are roughly 0.1 %. What is more, since participation is mandatory for all insured persons, the adverse selection problem inherent in voluntary private pension insurance policies does not arise upon retirement. Annuities turn out higher in mandatory insurance schemes because the cohort of insured persons is not expected to consist predominantly of persons with an above-average life expectancy. 

Furthermore, the funded pension component can contribute to broader and deeper capital markets. The funded pension component generates a substantial volume of funds that are invested in global capital markets. That means it can promote liquidity, diversification and capital market-based financing. As with the Swedish blueprint, it would play a part in improving the capital market culture in Germany and, over time, help strengthen domestic capital markets. 

The contribution to the funded pension component raises the overall contribution rate. In economic terms, this contribution differs significantly from a tax, however. 45 By contributing to this scheme, insured persons acquire claims depending on how much they contribute and the return in capital markets. Those contributions are thus more a kind of mandatory insurance scheme, albeit one where the investment options take the insured persons’ particular preferences into account, to a degree. Thus, contributions to a funded pension scheme have little in common with a tax. It seems plausible that contributions to the funded pension component will crowd out other forms of private old-age provision, at least partially. 46 Therefore, distortions to the labour supply and employment caused by contributions would probably be smaller than in the case of a tax or of contributions to the statutory health insurance scheme, which are mainly tax-like in nature. In addition, there would be a lower contribution rate to the pay-as-you-go system over time than absent the reform (see Section 6.3.2). 

The Pension Commission recommends interlinking the various funded pension components with government participation and developing them as a complete package. There are good reasons for that. Specifically, the Pension Commission recommends doing so for the funded component of the statutory pension insurance scheme, the public standard package of government-regulated and government-sponsored private pension products, and the early start pension. In this way, truly shared or similar solutions for account management, asset management, IT, and general administration would be able to reduce costs and take advantage of economies of scale. Investment principles, product standards and information could also be harmonised. This would avoid parallel structures, promote transparency, and potentially simplify investment decisions for those covered by the statutory pension insurance scheme or who make use of government-sponsored pension products.

In conjunction with the funded pension component, it seems advisable for legislators to look into whether the various government and government-sponsored modules are fit for purpose. Given that the funded component of the statutory pension insurance scheme would be quite broadly based, it seems worth questioning the broad and extensive government support provided in the other pillars. This is particularly true because public finances are under considerable consolidation pressure. With that in mind, thought could be given to gearing government sponsorship of private pension products in a more targeted manner towards lower-income households. In this context, thought could be given to only granting allowances for the government-sponsored instruments and no longer providing tax allowances.

The Pension Commission recommends that changes to the statutory pension insurance scheme be applied to civil servants with the same effect. This is generally logical, but should be aligned with the principle of alimentation (that is, the principle of appropriate support for civil servants). Expenditure on civil servant pensions is also rising significantly, and the consequences of rising life expectancy are becoming evident. It therefore makes sense to apply, for example, rising retirement ages and the recommendations on deductions and supplements to civil servants as well (see Sections 6.2.1 and 6.2.2). In particular, the changes in age limits would further reduce the demographic drag on the potential labour force. There is much to suggest that such adjustments should be implemented at the central, state, and local government levels at a similar time to the changes in the statutory pension insurance scheme. Other adjustments would need to be aligned with the principle of alimentation. This would concern, for instance, dampening the maximum pension rate (based on past or future developments in the statutory pension insurance scheme). 

The Pension Commission recommends that central, state, and local governments, when conferring civil servant status, should set aside sufficient provision for future pensions. This is welcome. On this basis, later pension expenditure would have to be sufficiently taken into account from the outset and the provision would have to be topped up in a rules-based manner. So far, conferring civil servant status may appear more advantageous in the short term because the pension burdens are not incurred until much later in the future. This biases personnel decisions at the expense of future budgets. Appropriately gauged provisions would mean that pension costs would already be transparent when deciding whether or not to confer civil servant status. This would also improve the basis for deciding whether an activity should be performed by civil servants or salaried staff.

The proposed reform contains a variety of components. The financial impact will depend on their specific design and implementation. In order to analyse how the contribution rate, replacement rate and central government funds, as the core parameters, evolve over the longer term, assumptions must also be made regarding capital market yields and macroeconomic developments. In its final report, the Pension Commission mapped indicative pathways for these core parameters with, in some cases, fairly wide ranges. 47 The following sections do not contain Bundesbank calculations for individual scenarios, but instead discuss, in a predominantly qualitative manner, specific issues concerning the financial effects on pension expenditure, the contribution rate in the pay-as-you-go system, and the central government budget. Uncertainty is even higher here than for standardised projections, as many specifications and configurations are still to be determined.

In the statutory pension insurance scheme, the current minimum threshold for the replacement rate of 48 % will apply until 2031. The Pension Commission recommends that the pension adjustment formula be fully reinstated thereafter. This means that the full effect of both the sustainability factor and the pension-dampening effect of a rising contribution rate will once again play out. This means that if the ratio of contributors to pension recipients falls, or if the contribution rate rises, then pensions will also rise less sharply. Taken in isolation, this, in turn, would push down both the contribution rate and central government funds and thus spread the financial pressure on the pension insurance scheme more broadly across the core parameters.

The Pension Commission also proposes increasing the impact of the sustainability factor after 2031. That would additionally dampen pension expenditure and the replacement rate. Specifically, the factor would be raised from its current value of 0.25 to 0.33. All else being equal, this would mean that the replacement rate in 2050 would be roughly 0.4 percentage point lower (in 2050, pensions would thus be around 1 % lower than they would have been without this increase in the sustainability factor). 48

The Pension Commission recommends a new mandatory additional funded pension component. Central government funds would safeguard an overall replacement rate of 48 % upon retirement with funded and pay-as-you-go pension components (transitional factor). According to the Pension Commission, the new funded pension component is intended, over the long run, to increase the overall replacement rate upon retirement (see Section 6.2.4). As long as the funded component is insufficient to raise the overall replacement rate of the standard pension to at least 48 % upon retirement, central government would top it up to 48 %. In this respect, the pension-reducing impact of the sustainability factor would be partially offset from 2032 onwards. The pension adjustment formula would then apply to insured persons as they continue to draw their pension. Central government would continue to provide a top-up for these pensions upon entry into retirement owing to the base effect. The extent to which top-ups would even be necessary depends, in particular, on the return on the funded pension component. Based on the Pension Commission’s simulations, the mandatory funded pension component would probably even fully offset the decline in the replacement rate under the statutory pension insurance scheme from 2032 onwards. In the simulation, the overall replacement rate upon retirement does not fall below 48 % 49 even without central government topping up the replacement rate; by 2050, it rises to more than 50 %. 50  

According to the pension adjustment formula, a higher contribution rate would dampen the pension adjustment. The Pension Commission also recommends that the new contributions to the funded pension component be taken into account in the pension adjustment formula. It is logical that these should also be factored into the calculation of the replacement rate under the statutory pension insurance scheme. All else being equal, this would reduce pension expenditure and thus also the contribution rate in the pay-as-you-go system from 2028 onwards (see the supplementary information entitled “The complex interplay between the new contribution to the funded system and the minimum threshold”). The Pension Commission recommends that the contribution rate to the funded pension component rise to 2 % by 2031. Taken in isolation, this would likely reduce the contribution rate in the pay-as-you-go system by around ½ percentage point. 

The pension adjustment would be higher because numerous other proposals from the Pension Commission would markedly dampen the contribution rate (see Section 6.3.2).

According to the Pension Commission, the contribution rate could, by 2050, be around 1½ percentage points lower than without reform. Under current legislation, the contribution rate could therefore rise to almost 21½ % in 2050. If the full package is implemented, the contribution rate would be significantly lower in 2050, at just over 20 %. This eases the burden on both contribution payers and the central government budget.

The reform affects the contribution rate in the pay-as-you-go system via various channels. First off, all measures that reduce spending are relevant. 51 These include, in particular, an increase in the age limits, the abolition of reduction-free early retirement and – as described above – lower pension increases. This dampens pressure on the contribution rate under the pay-as-you-go system and the central government funds linked to it. In addition, revenue-related measures create relief: the self-employed are included (those previously already self-employed will have an opt-out option), and contributions for persons in marginal employment rise to the normal level. In addition, central government refunds are higher as a result of the minimum threshold of 48 % applicable up until 2031. The positive effects on the labour market of the measures relating to when and on which terms people can retire also strengthen the statutory pension scheme’s revenue base. Additional expenditure will be incurred going forward as longer contribution periods or first-time contributions (self-employed persons) result in higher pension entitlements and those in marginal employment will, in future, receive benefits in return for their statutory contribution payments. 

Looking ahead, lower central government funds are likely to ease the burden on the central government budget. Over many years, however, significant additional expenses could arise from temporarily higher payments to the pension insurance scheme and tax shortfalls. 

This article is based on data available up to 18 August 2026, 11:00.

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