On May 30, 2024, the German government unveiled a significant move to secure the future of its pension system – the approval of the “Pensions Stabilization and Generation Capital Act,” commonly referred to as Pensions Package II.
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This reform is set to cement the pension level at 48% and introduce a “generation capital.” But what does this mean for you, and how can you navigate the changes?

What Is the Pensions Package II?

Pensions Package II aims to stabilize the German pension system in the long term.

Key elements include:

• Pension Level Stabilization: The pension level will be fixed at 48% until June 30, 2040. The pension level is a percentage value that reflects the relationship between the “standard pension” and the average income. The standard pension in turn refers to the pension that a person receives after 45 years of contributions with average earnings.

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Long-story short: it means that the German government guarantees that people that paid contributions for min. 45 years will at least receive a pension that is 48 % of the average income.

• Generation Capital Introduction: Starting 2036, a new capital funding method will be launched, designed to support the pension system without using taxpayers’ contributions.

Highlights of the Reform

Pension Level Fixation
Currently, the pension level is 48%, and without intervention, it could fall below 45% after 2025 due to wage trends. The government’s move to stabilize this ensures that future pensioners can rely on their pensions being a consistent percentage of their average earnings.

Generation Capital

The Generation Capital initiative involves setting up a fund managed by an independent public foundation. This fund will invest globally, and only the returns (minus loan interest) will support pensions, ensuring the capital remains intact. By 2036, it aims to generate annual payouts of about €10 billion to bolster the pension system.
This is a new approach for the German pension system, as something like this has not existed before. Until now, the system was purely funded by the taxes we all pay.

Financial Implications

• Contribution Rates: Currently, pension contribution rates are stable at 18.6% until 2027, with employers and employees paying 50 % each. However, demographic pressures mean these contributions could rise to 22.3% by 2035. The Generation Capital initiative aims to keep these rates steady until 2045, offsetting some of the demographic burdens.
• Federal Budget Contributions: Federal contributions to pensions relative to GDP will remain around 3%, aligning pension increases with wage growth.

Expert Opinions

• Support and Criticism: Supporters believe this reform injects much-needed stability into the pension system. Critics, however, like GDV’s Jörg Asmussen, argue this imposes financial burdens on younger generations and view Generation Capital as a delayed solution.
• Political Stances: Left-wing leader Janine Wissler calls for a higher fixed pension level of 53%, arguing the reform doesn’t go far enough. Meanwhile, economist Bernd Raffelhüschen claims the reform unfairly shifts the demographic burden onto younger generations.

As is often the case in politics, you will find proponents and opponents for this reform alike. The only aspect everyone agrees upon is that the system needs changing. How many and how far-reaching they should be, usually depends on your political point of view.

How Dies This Affect You?

For Pensioners: The stable 48% level ensures your pension remains a significant part of your earnings. With the introduction of Generation Capital, your future pensions will be better safeguarded against market and demographic shifts.

For Employees: Anticipate a rise in pension contributions post-2027. However, the Generation Capital fund’s returns should help stabilize long-term rates, reducing the financial strain on your income.

For Future Generations: While the reform promises stability, it also highlights the importance of preparing for personal retirement savings. The debate around Generation Capital underscores the necessity of diversifying your retirement planning.

Conclusion

Understanding these changes is crucial for making informed decisions about your retirement planning.

Given the potential rise in contributions and the uncertainties surrounding public pensions, private pension funds offer a robust solution to ensure financial security in retirement. They provide flexibility, tax advantages, and the opportunity to tailor your retirement plan to suit your individual needs. Investing in a private pension plan today can help mitigate future risks and offer a higher degree of financial stability in your old age.

If you need help to find the correct plan for your situation, make sure to reach out to us and we will be able to help you with it!

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