Germany is preparing for the biggest pension reform in decades. Chancellor Friedrich Merz's government has agreed on the basis of changing the scheme, with the law expected to pass the Bundestag by the end of 2026.

Commenting on developments for News24DW analyst Auron Dodi said the reform comes as a result of two major pressures facing Germany: the aging of society and the weakening of the economy.

According to Dodi, the reform has two main elements: the gradual increase in the retirement age and the financing of part of pensions through the stock market.

According to him, for employees who are currently in the labor market, the change will be limited and there is no question of an immediate postponement of retirement for years. Meanwhile, Chancellor Friedrich Merz has guaranteed that current pensions will not be cut.

One of the most important innovations of the reform is the creation of a state equity fund. Employees will initially contribute 0.5% of their gross salary, while by 2031 the contribution will increase to 2%. This money will be invested in the capital market to create additional income for future retirees.

Dodi explained that this model is similar to that of Sweden, where a portion of contributions has been invested in financial markets for years.

According to forecasts, a person who contributes to the fund for 20 years could benefit from around 150 euros extra per month, while for those who contribute for 45 years the benefit could be over 770 euros per month.

A special part of the reform is related to migrants, who according to Auron Dodi have become a key factor for the German economy.
The reform is also expected to expand the contributor base, including more categories such as the self-employed and people who have not been a full part of the system until now.

However, according to experts, migrants who arrived in Germany late or had interruptions in contribution payments may receive a lower pension, as the system favors those who contribute for long periods.

The German reform is being followed with interest in Europe, as Berlin aims to change the way pensions are financed and mobilize private savings through capital markets.

With this step, Germany aims to create a more sustainable system in the face of an aging population and labor shortages.

Interview for News 24

News24: In Germany, Chancellor Merz's government has agreed to the foundations of the most far-reaching pension reform in decades. The law will also pass the Bundestag, the federal parliament, before the end of 2026. But what will it bring to workers, and what about migrants?
To learn more, I am now connected in Germany with Auron Dodin, at DW.

Auron, hello!

Few expected this summer turnaround. What is the grand plan?

A. Dodi: The German government faces two pressures: an aging society and a stagnant economy. That's why it needed to act.

A commission of 13 renowned experts was appointed to submit proposals. And the conservatives of the CDU/CSU and the Social Democrats immediately said they would implement all of these proposals on July 2nd when the experts' report was presented.

The reform has two central elements. The first: the obligation to finance part of the pension in the stock market. The second: the very gradual increase in the retirement age.

Because age is what interests us the most: the legal retirement age is already rising step by step. It will reach 67 in 2031. From there, the reform will increase it further, in line with average life expectancy in Germany.

But people in Germany will not retire at 70 until 2092. This means that for those of working age today, the reform will only postpone retirement by a few months, not years. What's more: pensions will not be cut, Chancellor Friedrich Merz has made this clear.

The success of the reform, which is expected to be approved by the Bundestag by the end of the year, can also be explained by two factors: The government passed on the most radical proposals to experts. Also, the growing pressure from the right-wing populist AfD party pushed everyone.

The new one is the mandatory contribution to a stock fund. How much will be deducted from the employee's salary?

Initially, only 0,5 percent of the gross salary will be withheld, a figure that will gradually increase to 2 percent by 2031. This contribution is shared equally between the employee and the employer, who pays the other half. This money is paid into a state fund, which invests it in the capital market. This is how Sweden, for example, has been operating since 1999.

The longer an employee contributes to the shares, the more money they will receive: twenty years bring them about 150 euros more per month, forty-five years of contributions over 770 euros per month.

The statutory pension will not be affected. This equity fund is simply added to it. For the first time, the capital market will also work for small pensions.

News 24: Let's stay here. Compared to other countries, how high is an employee's pension in Germany? And how will it be financed?

Auron Dodi: In Germany, your pension is not paid for by your savings. It is paid for by the younger generation working today. This is called a distribution system (Umlageverfahren). The contributions of those working today go directly to today's pensioners.

The pension level in Germany is about 48 percent of the average salary. It is for someone who has worked for forty-five years. It seems little, but it is not so little when you look at it closely. France, for example, promises 50 percent. But France only counts the best twenty-five years of work. And yet the system is struggling.

The reform also aims to expand the circle of those who will pay. Now, for the first time, the self-employed and members of parliament will contribute. Perhaps civil servants too. Even minimum wage work, 'minijobs', will be more included in the pension system. This way, the burden is shared among more shoulders.

Another element of the reform's financing is the tax increase to 47 percent for those earning over 250.000 euros per year. But it is thought that there are about 150.000 people, no more.

News24: Let's focus on those who are sometimes forgotten: migrants. What does this reform bring to them?

Auron Dodi: First of all, it should be said that to a considerable extent, it is the incoming migrants who keep the pension system in Germany afloat. Today, about one in five employees holds a foreign passport. This is double the number in 2004.

According to official sources, it was especially the workforce from Ukraine and the Western Balkans that compensated, for example, in 2022, the gap in German contributors.

New migrants are also notable as entrepreneurs. They represent 21 percent of those who establish businesses, although they are only 18 percent of the population. Their number reached 773.000 in 2018. The reform includes them in the pension scheme for the first time.

At the same time, it should not be forgotten: those who have come late or have interruptions in their pension contributions will collect less money and points. Those who contribute early and without interruption will earn more from the new fund.

News 24: Europe is watching this German reform with interest, according to the media. Why?

Auron Dodi: Germany is moving towards eliminating a particular handicap. And this will be felt far beyond its borders because of the size of the German economy. Germans save their money carefully. But they keep it mostly conservatively, in savings accounts. They have generally seen stocks as a risky game. Now, the new state stock fund is breaking that pattern.

Every year, around 30 billion euros will flow into the stock market through it. Thus, Germany acts similarly to countries like Denmark, the Netherlands and Sweden, which have long been strongly oriented towards capital markets.

Such a step by an economy as large as Germany also increases the chances of creating a genuine common capital market in the EU. This project unites the continent's savings for growth. It also applies to small countries. Also, with the reform, Berlin sent a signal to investors: that it is able to act when it wants.