German Pension Insurance
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Rentenversicherung (pension insurance) is the method of securing pension payments for retirement. All employees, along with apprentices and certain groups of self-employed people are obliged to have public pension insurance.
An introduction to the German pension system
Contributions into the Pension insurance scheme are 18.7% of gross salary up to €74,400 in Western Länder and €64,800 in Eastern Länder and are split equally between employers and employees.
You don't have to set anything up for your retirement/pension and unemployment insurance as these values is automatically withdrawn from your income.
Pensions are generally paid at the age of 65, but it is also possible to receive an early pension or alternatively work longer and receive the pension at a later age. You will also receive part of it even if you decide to spend your retirement in another country.
The German pension system, like many other EU countries, has come under serious strain during the last decade and is an issue you will see widely covered in the media.
Each working generation pays directly for the prior generation's pensions so the system needs to balance payments from current workers with those to pensioners. The issue of low birth rates and an increase in life expectancy means less people are financing more pensioners. High unemployment has also reduced payments into the system. Many economists are calling for more immigration of young workers to balance this out.
The pensioner vote has meant that German politicians have had to postpone serious reform for decades. Although the system is not sustainable in its current state, politicians have preferred to pass the problem on the next generation. There is a famous saying of German minister, "Die Renten sind sicher" (the pensions are secured), which today is quoted with cynicism by many who fear for their pensions.
This fear is not irrelevant. Most economists agree that the current working generation will only receive a small fraction of the money it pays in today. To avoid the risk of living on social aid in retirement, you should consider an additional private pension to supplement your potentially low income from the state system. Consumer advice agencies give information on state schemes to fund private and company pension schemes.
The German Retirement and Pension System - Basic Facts
Ever since Germany established its first Social Security system in 1889, the public retirement insurance has been "pay-as-you-go", with the current pensions of the retired paid from the current premiums of the not yet retired. Currently about 85% of the work force is enrolled in the Public Retirement Insurance (gesetzliche Rentenversicherung GRV).
Civil Servants, who make up about 9% of the work force, have their own pension system and the self-employed, who make up about 9% of the work force, are mostly self-insured (but are allowed to participate in the GRV.)
There are three pillars to the German retirement system:
- The government-run Retirement Insurance system
- Private company plans
- Private individual retirement investments
Public Retirement Insurance System
The Public Retirement Insurance System, which also includes survivor and disability benefits, has been dominant. Participation is mandatory for employees, with each worker assessed for a sum based on annual earnings. Premiums are deducted by the employer, with the employee paying half and the employer half. In 2016 the premium is 18.7 percent of the gross monthly wage or salary. This is assessed on monthly incomes up to a maximum of €6,200 (€74,400 a year) in the west and €5,400 (€64,800 a year) in the east.
Retirement now normally begins at age 65, though it is to be gradually increased to 67. Contributions to the plan are also to be increased, and maximum pensions eventually reduced from 70% to 67% of net pay.
Company Plans (bAV betriebliche Altersvorsorge) have traditionally been designed to supplement Retirement Insurance, and are starting to play a greater role in taking up the slack. Government subsidies and tax breaks will encourage companies and employees to invest in private plans. Although company plans are not compulsory, they cover about three-fifths of the working population, a percentage that is expected to grow. Pensions on company plans usually also commence at age 65, though this is likely in many cases to follow the Retirement Insurance practice and the demographic age trend and increase gradually to 67.
Individual Retirement Investments
Individual retirement investments have been the less significant up to now, but have recently received a lot more attention as supplements to the Public Retirement Insurance. These private plans include, but are not limited to, the Riester and Rürup plans. Workers and other participants can get certain tax advantages and benefits from government subsidies for these plans. The benefits and other details do vary from plan to plan. There are differing payment methods, payout schemes, tax liabilities, portability opportunities and other factors that distinguish these plans from one another. Certain plans may be better for different individuals depending on their individual situation.
Expatriates living in Germany are entitled to join all these plans. It may be possible to pay premiums to, and get benefits from, private pension plans even after having left Germany. Benefits from company plans usually can be received outside of Germany, though premiums are not always refunded. If an expat qualifies for a pension under the Public Retirement Insurance it can be paid to them even if they do not live in Germany. Laws and regulations may vary from country to country regarding collecting a pension from Germany or any other country. You should check with the pension authorities in your country of residence to see if a German pension would have any effect on any pension you may have earned in that country.
The pension system is very complicated:
- Means of determining the amount of pensions,
- Provisions for early retirement,
- Increased retirement benefits for staying on the job beyond 65, etc.
It is very advisable to consult a financial advisor to see what plan is best suited for you.