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Germany’s reforms aimed at persuading workers to retire later do not go far enough to ease the fiscal strain of a rapidly ageing workforce, the Bundesbank has warned.
Chancellor Friedrich Merz’s plan to introduce tax incentives for pensioners who keep working are “likely to have only a limited effect” in a country where early retirement is widespread, the central bank said.
It pointed out that Merz was not scrapping existing financial incentives that encourage early retirement.
“Key pension policy levers to address the demographic challenges remain unused,” the Bundesbank wrote in its latest monthly bulletin published on Tuesday.
Germany will in coming years be one of the most significant test cases of how western economies can cope with the fiscal burden of rapidly ageing populations.
Its pay-as-you-go retirement scheme will face mounting funding pressures as 4.8mn older Germans are due to retire by 2035, resulting in a 9 per cent decline in the labour force. Even today, 27 per cent of the federal government’s budget — €133bn in 2025 — is used to plug holes in the public pension scheme.
Germany is among the numerous EU countries, including France, that rely on state pension systems to provide people with an income in older age, despite recent efforts to grow private retirement savings.
“Demographic developments are putting considerable pressure on the German labour market and public finances,” the Bundesbank warned, adding that “longer working lives” would be a fix. One option would be to link the legal retirement age to rising life expectancy, it suggested.
Merz’s predecessor Angela Merkel in 2007 raised the legal retirement age from 65 to 67 in a highly controversial move. But for now, the majority of German workers retire early. According to the Bundesbank, this is driven by a number of financial incentives. Workers who have been in the labour market for 45 years can retire two years early without suffering financial penalties.
Those who have worked for fewer than 45 years and want to retire early have to accept cuts in their pensions that the Bundesbank calculates are too generous. According to the central bank’s analysis, the deductions for workers who fall into that category should be a third higher than they currently are.
“The new federal government does not intend to change the rules for pension eligibility,” the central bank notes in its report, adding that the promised steps to “strengthen the labour force potential and extend working lives” will not be “quantitatively significant”.
It points to surveys showing that only 14 per cent of older people remain in the workforce because of financial motivations. Many more do so because they like their work or want to keep in touch with colleagues and other people.
