Martin Klotz is responsible for the topics of old-age provision and income protection at Finanztip. Even in his time as an independent financial planner, he kept a close eye on insurers and knows the pitfalls of contracts. In addition to economic issues, Martin is particularly passionate about sports. In this department, he also started his career in radio in 2007, parallel to studying economics and journalism.
- Who earned 45 years on average in Germany, currently receives a pension of 1.538 euros gross. For many, the statutory pension alone will not be sufficient in old age.
- The age for regular retirement is gradually increasing from 65 to 67 years. If you retire earlier, you get less pension.
- The basis of the statutory pension is the pay-as-you-go system: The current contributors finance the current pensioners.
- In the future, there will be fewer and fewer statutory pensions. Therefore, make private provisions.
- Try to estimate your pension gap realistically. The annual pension information that you receive is helpful in this process.
- Check if you can increase your pension by voluntary contributions.
- If you want to start your pension more freely, take a look at the Flexi pension.
In this guide
Nearly 39 million Germans pay monthly into the statutory pension insurance a. And for most people, the statutory pension is the most important pension most important building block to secure an income in retirement: the statutory pension accounted for around 63 percent of income in old age in 2015, according to the Ministry of Labor. But the proportion will be less in perspective – and private pension provision more and more important.
How does the statutory pension work?
The system of the legal pension-ver-si-che-rung in Germany is based on one pay-as-you-go system. This means that the current generation of contributors finances the pensions of the current generation of pensioners. The money paid in is directly apportioned and paid out. If you work today, your pension will be financed later by the next generation of children and grandchildren. One therefore also speaks of a Intergenerational contract.
For decades the pay-as-you-go system has basically worked well. With the demographic change However, the German pension fund is facing the greatest challenge in its history. Rising life expectancy and low birth and immigration rates mean that the German population is getting older and older. As a result, there are more pension recipients and fewer contributors. 50 years ago, 4 pensioners provided for one pensioner; today, only 1.8 pensioners provide for one pensioner. In 2030, when the baby boomers retire, only 1.5 contributors are expected to finance one pensioner.
Due to the pay-as-you-go system, the development of the pension is linked to the development of wages. If the average wage per capita of current employees rises, the pension of current pensioners will also rise. The cut-off date for an adjustment is always 1. July of a year. Also in 2021 there was a Pension adjustment: In the eastern German states, pensions increased by 0.72 percent; in the west, the value remained the same at. Due to the Corona pandemic, wages in 2020 had not increased, but decreased.
Pensions rise less than wages
In principle, however, wages and pensions do not rise in lockstep. In the pension formula, with the help of which the amount of the pension is calculated, there is a Sustainability factor. This takes account of demographic change: because the proportion of younger Germans is declining, there are fewer and fewer contributors to finance a pensioner. To ease the burden on contributors, pension increases are lower than wage increases due to the sustainability factor.
Pension level not below 48 percent
Because pensions increase less than wages, the so-called pension level decreases over the years. It tells how much a saver who has paid into the pension fund for 45 years will get in pension (before taxes) – measured as a percentage of average income (before taxes).
The grand coalition has agreed to maintain the current pension level of 48 percent until 2025 to stabilize. This means that after 45 years of contributions, a standard pension should not fall below 48 percent of the average earnings then applicable. Among other things, contributions could rise as a result. By 2030, the pension level should be at least 43 percent.
In January 2021, the grand coalition also introduced the basic pension. The idea: Those who have paid into the pension fund for years should receive more than the basic income support. Everyone has a right to this. You can read more about this in the last section of the text.
So high is the contribution to the pension-ver-si-che-rung
Employees subject to social security contributions pay a portion of their income into the pension insurance scheme. Since the beginning of 2018, the compulsory contribution for the pension insurance has been 18.6 percent. It is borne half by the employee and half by the employer.
In its pension package, the grand coalition has agreed to raise this contribution rate to a maximum of 20 percent by 2025, and to a maximum of 22 percent by 2030. On the basis of this agreement, Deutsche Ren-ten-ver-si-che-rung assumes that the contribution rate will be raised in 2023 at the latest, probably up to 19.3 percent. In the 2017 pension insurance report, the German government had still forecast a necessary increase to over 20 percentage points.
Only incomes up to the contribution assessment limit are taken into account. In 2021, this limit will be 7 points in the West.100 euros per month, in the east at 6.700 euros (85.200 euros or 80.400 euros per year). Those who earn more do not have to pay a contribution on the income above the limit. Since 2019, the contribution assessment threshold (east) has been gradually raised to the western level until it reaches the western level in 2025.
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How much pension can you expect?
In the pay-as-you-go system, paid-in contributions are immediately paid out to current pensioners. A contributor accumulates his own entitlements in the form of Pay points, colloquially pension points. They are calculated according to the level of earned income. And in such a way:
One earning point is collected by those who earn exactly the same amount in the respective year as the average German. In 2021, this average income will be 41% gross.541 euros.
For example, if you earn only half of what you earn, you will be credited with half a pension point for this year; if you earn twice as much, you will be credited with two points. A monetary value is assigned to an earning point (Pension value). In the West, since July 2021, one point has brought a pension of 34.19 euros, in the East 33.47 euros.
Calculating a pension with a formula
The pension insurance company then converts the earning points into a pension using a formula: monthly pension amount = earning points x access factor x current pension value x pension type factor.
The access factor takes into account increases or reductions that may occur, for example, due to an early start to retirement. The pension type factor refers to different levels of pension types. For example, a payment for partial reduction in earning capacity is only half of a full pension.
This is how much a basic pensioner gets
The so-called corner pensioner is often used as a model for calculating the pension amount. This is a consumer 45 years always at the German average earned. In 2021, such a retiree can expect a gross pension of around 1.538 euros calculate. After contributions to health and long-term care insurance and before taxes, a pensioner will still have just under 1.350 euros.
Strengthen private pension provision
This pension will be enough for very few people to maintain their standard of living in old age. It is therefore all the more important to consider the possible financial gap in old age at an early stage and to make additional private provision. In our guide to private pension plans, we explain how you can estimate your pension gap. In the pension guide, you will find several decision trees for possible supplements to the statutory pension – such as Riester contracts, company pension plans or flexible saving with low-cost equity index funds (ETFs).
How to close your pension gap
Flexible and inexpensive retirement planning with equity index funds (ETFs): We explain to you how it works!
When the pension starts?
There are various regulations that make it possible to end working life earlier or later. The basic model is Standard retirement pension. Everyone who has paid into the statutory pension scheme for at least five years is entitled to a standard old-age pension. This is called Minimum insurance period or waiting period.
For several years, the retirement age has been gradually increasing from 65 years to 67 years. Those born in 1964 or later will not be able to retire until age 67 without having their pensions reduced.
In 2021, new pensioners born in 1955 and 1956 will be able to claim their pension at the age of 65 years and nine and ten months respectively. The year 1957 goes from 2022 in standard retirement pension and must work again one month longer.
Overview of raising the standard retirement age
Source: Deutsche Ren-ten-ver-si-che-rung (as of August 2021)
For severely disabled persons, the standard retirement age in 2021 is 63 years and eleven months (born in 1957). It will gradually rise to 65 years by 2029.
Special case: Particularly longstanding insured
Anyone who has been insured for 45 years may retire early at the age of 63 at the earliest without having their pension reduced. This is called an old-age pension for those insured for a particularly long period of time. Here, too, there is a transitional regulation for raising the age limit. For those born in 1964 or later, early retirement is not possible until age 65.
Reductions for early retirement
Fewer and fewer insured persons will fulfill 45 years of insurance time. Those who nevertheless wish to apply for a pension before their standard retirement age must accept deductions on the payments. Each month of early retirement costs 0.3 percent of the monthly pension payment. Prerequisite for this is a 35-year waiting period in the pension insurance (old-age pension for long-term insured).
Example: According to the law, a man born in 1960 would have to work until the age of 66 years and four months in order to receive the standard retirement pension without deductions. If he doesn’t get to 45 years of contributions and still wants to retire at 63, his pension will drop, by 0.3 percent x 40 (= 12 percent). Because he would have had to work 40 months more for a pension without deductions.
How much can you earn in addition to your pension??
Not everyone wants to retire early, while others are happy to leave work early and earn extra money on the side.
To meet these different needs, since the beginning of 2017, the Flexi Pension Act. It is intended to facilitate a more flexible entry into retirement: Those who retire earlier or later than the standard retirement age should find it easier to continue earning money.
Those who retire regularly, was already allowed to earn unlimited additional income in the past; however, this did not increase the pension entitlement. With the Flexi-Rente, the employee can continue to pay contributions into the pension insurance system. This increases the pension entitlement once a year.
Those who retire early, may earn only limited additional. The exact calculation of the amount and reductions of the pension changed in July 2017 by the entry into force of the second part of the Flexi Pension Act.
As before, it is possible to postpone retirement. Every month after the standard retirement age in which you do not apply for a pension, the payment is increased by 0.5 percent. If you continue to work, you increase your pension additionally, because you continue to pay into the pension fund.
Compensate for reductions
You can compensate for reductions due to early retirement with additional contribution payments. Under the Flexi-Rente Act, people as young as 50 are allowed to make special payments into the statutory pension scheme to compensate for reductions in pension payments.
The Deutsche Ren-ten-ver-si-che-rung helps with the calculation of these payments. It offers a calculator, with which each citizen can go through different variants to the personal pension entrance.
More pension through care
Those who care for relatives are credited with additional earning points under certain conditions – and can thus improve their pensions. Since the Flexi pension came into force, pensioners who care for their spouse, for example, can also earn additional pension points as a result. Up to 30 euros per month can be added to the income of pensioners who care for their hair.
The prerequisite is that the nursing case has at least the nursing degree 2 or higher, you care at least two days and at least ten hours a week and for at least two months a year.
If you already receive a pension, you must contact the pension fund. To use the model, you must be classified as a partial pensioner and give up 1 percent of your statutory pension. In total, however, it is usually worth it. The pension insurance calculates the following for you.
Who all is compulsorily insured?
Not only employees subject to social insurance contributions, but also self-employed persons, especially craftsmen or midwives, can be compulsory members of the pension insurance scheme. Additionally, there is the option to make voluntary contributions as a self-employed person. Self-employed people have to pay their contribution completely on their own, unless they are a member of the artists’ social insurance scheme. Because this takes over the employer’s contribution.
For whom else there is pension
Due to some special regulations, periods without own or with reduced contributions also count towards the minimum insurance period for the pension. are compulsorily ins.
- Mothers or fathers during the child-rearing period. For children born after 1. If a child was born on January 1, 1992, one parent is credited with about one earning point each for three years. For children born before 1992, there are two years of child-raising time (maternity pension). The additional pension entitlement is also available if the parent works part-time. However, the claim is only credited up to the allowance limit.
- Caring relatives. The nursing care insurance fund pays contributions to the statutory pension insurance scheme for her. The amount depends on the care required and is calculated individually.
- People with disabilities.
- People doing military service or people doing federal voluntary service.
- Recipients of sickness benefit, unemployment benefit I or other maintenance replacement benefits.
- partly also students with a part-time job.
For a mini-job, there are also contributions of 15 percent, which are paid by the employer. Mini-jobbers can add 3.7 percent to this contribution themselves. In the case of a so-called midijob, the employer pays a share of 9.35 percent, while the employee pays a reduced contribution, which is calculated according to the level of income. Midijobbers can also top up to the full contribution and thus acquire higher pension entitlements.
Who can make voluntary contributions?
With voluntary contributions, either the future pension can be increased or an entitlement to a pension can be built up at all.
In principle, every citizen can voluntarily pay contributions into the German Pension Insurance Scheme. It is only necessary to register with the relevant pension insurance institution, stating the date from which contributions are to be paid and the amount. The pension insurance company advises on the application process. This is particularly worthwhile if the waiting period can be fulfilled by making a few additional payments.
Example: A mother who gave birth to two children before 1992 has acquired a total of 24 months of contribution time. She lacks a further twelve months for the minimum insurance period for the standard retirement age. If she pays these contributions voluntarily, she acquires a claim to a statutory pension without ever having been employed subject to social insurance contributions. For children born after 1992, there are automatically three years of child-raising time. The pension package launched by the German government stipulates that mothers and fathers with children born before 1992 should receive an additional half pension point.
If you take out voluntary pension insurance, you can determine the amount and number of contributions yourself. 2021, the contributions must be at least 83.70 euros and no more than 1.320.60 euros per month. In most cases, you can still pay the contributions for one year up to 31. pay in arrears by March of the following year. In a few exceptions, such as the mother’s example above, voluntary contributions are still possible many years later.
What information can you find in the annual pension information??
Insured persons who are at least 27 years old and have completed the minimum insurance period receive pension information every year. In it, Deutsche Ren-ten-ver-si-che-rung calculates the amount of the pension payment for various scenarios.
On the one hand, you will find the amount of your full earned mini-retirement pension and the amount of your standard retirement pension, which you would reach with your accumulated entitlements. In addition, the pension information shows how your pension entitlement will develop if you maintain the average earnings of the past five years.
A projection of the pension amount shows, as an example, how the pension would turn out if the pension level were to be adjusted by 1 or 2 percent annually. If you do not receive the bill, you can easily request it on the insurance company’s website.
Especially in the first years after starting a job, the calculations of the pension insurance for the old-age pension are hardly meaningful. Because the calculation is based on the past five years. Contributions from the student job may still be included in the calculation there. However, the projected old-age pension after five full years of work should be significantly higher.
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How high are taxes and health insurance contributions??
On pensions from the statutory pension insurance you pay the personal income tax rate – but only from 2040 onwards on the full pension. In advance, the taxable portion of the pension is gradually increased. If you receive a retirement pension for the first time in 2021, a taxation rate of 81 percent applies permanently. This means that 19 percent of your pension will be tax-free. This percentage decreases for younger pensioner cohorts, so that only 18 percent will be tax-free when pensions start in 2022, for example.
Since pensions increase a little every year, you may suddenly be required to submit a tax return. You can find details on this in our guide to Annex R in the tax return.
You have to pay contributions to the statutory pension Health insurance for pensioners pay or take out voluntary statutory health insurance. The contribution rate in both cases is 7.3 percent plus half the additional contribution.
Pensioners have a right to subsidies in private health insurance. Contributions will also continue to be made to the nursing care insurance scheme.
Where does the political pension debate stand?
It is a challenge: the statutory pension should remain affordable during working life and at the same time ensure a livelihood in old age. When the baby boomers retire in the next ten years, the problem will become even greater. Today, 1.8 contributors provide for one pensioner; in 2030, there will probably only be 1.5 contributors left. Just under 50 years ago it was still four. In order to be able to finance the statutory pension in the future, either revenues must be increased or expenditures reduced.
In 2018, the grand coalition put together a pension package. Among other things, it provides for the pension level to be maintained at around 48 percent of average earnings. The pension level indicates what percentage of the last income a so-called corner pensioner (45 working years at the German gross average wage of currently around 41.500 euros) in retirement as a pension before taxes will receive. Although this promise is initially only made until 2025, the current law provides for a pension level of at least 43 percent by 2030.
The contribution rate is another factor affecting the pension fund. This is the share that you, as an employee, pay together with your employer from your salary to the pension insurance fund in order to finance today’s pensions. It is currently 18.6 percent, half paid by the employee and half by the employer. The SPD and CDU/CSU have decided not to exceed 20 percent by 2025. The contribution rate may rise to a maximum of 22 percent by 2030.
At the beginning of June 2017, the legislator bundled some of the demands of the past years with the so-called Occupational Pension Strengthening Act, which came into force in 2018: For example, Riester pensions and occupational pensions will no longer be counted in full towards basic benefits. Those who have made provisions for their old age in the course of their lives should also benefit from this in the case of basic security and have a little more left over.
It has also been decided that pensions in the east and west will be equalized. Up to now, the pension value, i.e. the amount that a pension point is worth when paid out, has differed from one country to another. This is to become uniform by 2025. This is positive for current and soon-to-be East German pensioners, whose pensions will be higher.
For employees in the east, however, this adjustment may mean a loss of income. Because many earn less in the east than in the west. Therefore, salaries are fictitiously extrapolated when it comes to the due contribution to the pension insurance. This means that employees in the east are currently entitled to more pension points for lower salaries. But this higher valuation will no longer apply in the future.
In January 2021, the basic pension was also introduced according to a draft by Labor Minister Hubertus Heil (SPD). The principle is that those who have paid into the pension fund for years – at least 33 years of contributions – should receive more than the basic old-age pension. Maximum basic pension is 418 euros per month. You do not need to make an application for this. The DRV has been sending out the first basic pension notices since July 2021. However, the individual examination of all pensioners will take time. But regardless of when you receive the pension notice: The basic pension is paid retroactively from 1 January 2009. January 2021 paid. However, there are maximum limits. The allowance is 1.250 Euro monthly income for singles and at 1.950 euros for couples and registered partnerships.