The further away retirement is, the less worried most people are about their finances in old age. If you understand how the statutory pension works, you can make targeted provisions at an early stage.
The most important thing in brief:
- Since 2012, the retirement age has gradually increased to 67 years. Those born in 1964, who will retire in 2031, will be the first to be fully affected.
- The pension level is guaranteed until 2025 at 48 percent, i.e. almost half of the average income, of all insured people.
- It's worth reading the pension information. It is an initial orientation to become aware of the later pension gap as the difference between the cost of living in old age and the expected pension.
The further away retirement is, the less worried most people are about their finances in old age. If you understand how the statutory pension works, you can make targeted provisions at an early stage.
The statutory pension is the most important component of retirement planning for most people. On average, however, it is less than half of the last gross income before retirement. In 2022 it was an average of 1,728 euros for men and an average of 1,316 euros for women after 35 years of insurance. Taxes and social security contributions are also deducted from this. The statutory pension should therefore not remain the only building block for finances in old age.
The statutory pension insurance system in Germany is based on the pay-as-you-go system, also known as the generation contract. Afterwards, the current generation of contributors pays the pension of today's pensioners. The generation paying in today – i.e. the current employees – will receive their pension later from the children and grandchildren who will then pay. So not everyone saves their own pension, but rather the pensions are paid from the pension contributions received by employees every month.
Pay-as-you-go system – this is how it works
In principle, the pay-as-you-go system has worked well since its inception. In recent years, however, the challenges posed by demographic change have been great: due to increasing life expectancy and low birth rates, our society is getting older on average. From 2025 onwards, the baby boomers born in the 1960s will retire. Although the employment of women and the immigration of workers are increasing, they are not enough to compensate for the loss of the baby boomers – the so-called baby boomers – as contributors. As a result, fewer young people – i.e. contributors – will have to finance more older people who are already retired.
The legislature has reacted several times:
- Since 2001, the pension level has been reduced and, to compensate, the Riester pension has been introduced as a private, voluntary and state-funded provision.
- Since 2012, the retirement age has gradually increased to 67 years. Those born in 1964, who will retire in 2031, will be the first to be fully affected.
Pension amount and pension formula
The prerequisite for a pension from the statutory pension insurance is at least 60 calendar months in which the insured person has paid contributions.
The legislature regularly adjusts the pensions on July 1st of each year, which means they usually increase over the years: Due to the pay-as-you-go system, the development of the pension is linked to the development of wages. If the average gross wage of all insured people increases, then the pension also increases. If gross wages fall, a legal protection clause prevents pensions from falling. In such a case, there is a so-called zero round, the pensions remain unchanged compared to the previous year. The last time there was a zero round was during the corona pandemic.
Between 2000 and today, pensions rose by an average of almost 2.3 percent per year. The increase was slightly higher than the average inflation rate, which was about 1.9 percent over that period.
However, despite the regular adjustments, wages and pensions are not increasing to the same extent. In the pension formula, the so-called sustainability factor has been taking into account the fact that there are fewer and fewer contributors for several years. The sustainability factor ensures that the contribution rate that paying employees have to shoulder remains stable. Due to demographic change, pensions are increasing more slowly.
Pension level and average pension
The pension level is guaranteed until 2025 at 48 percent, i.e. almost half of the average income, of all insured people. This is a purely mathematical value based on an exemplary pensioner. This so-called standard pensioner has always earned the average income of all insured people in 45 years of work. If the contribution income is not sufficient for this pension level, the federal government must provide additional funds.
The pension level of 48 percent is often understood as a minimum pension or as a percentage of an individual person's final income. However, that's not it. It is an exemplary size that is used to control the statutory pension insurance system.
Very few people reach 45 years of contributions. There are various reasons for this, such as longer breaks, part-time jobs, longer training periods or self-employment. The actual national average pension level is also lower than that of the so-called standard pensioner: on average, German pensioners receive around 39 percent of the average income of all insured people.
Pension information
So that insured people can estimate as early as possible how much pension they will receive, the German pension insurance sends out pension information every year. All insured persons who are at least 27 years old and have paid in for at least 60 months will receive information about the status of their pension entitlements. The basis is the data stored by the pension insurance company. Insured persons should definitely check these, as they may not be complete – any insured person can request account clarification for this purpose. In particular, insured persons must apply for child-rearing periods themselves.
The pension information provides information about the
- Pension claims due to total disability
- Amount of pension entitlements achieved so far
- Amount of claims if insured persons continue to pay contributions that correspond to the average of the last five years
Pension forecasts are also given for possible increases of one and two percent.
The information uses certain technical terms that insured persons should know:
Pay points are the most important values for later retirement. Year after year, the earnings of an insured person are divided by the average earnings of all insured persons. The average gross salary is currently 45,358 euros annually. The sum of the earnings points is multiplied by the pension value for the individual pension entitlements and results in the pension. It works like this:
- If insured people earn exactly the average annual salary, they receive a salary point.
- If you earn more, for example 50,000 euros annually, you will receive 50,000 euros / 45,358 euros = around 1.1 pay points. v
- If you earn less, for example 40,000 euros annually, you will receive 40,000 euros / 45,358 euros = around 0.9 earnings points.
Pension value is the equivalent value for one pay point. It is adjusted every year to reflect economic developments. It is currently 37.60 euros per pay point.
It's worth reading the pension information. It is an initial orientation to become aware of the later pension gap as the difference between the cost of living in old age and the expected pension. This means that insured people can set the course for private retirement provision at an early stage. Those interested can find further information about private pension provision here. Using the online calculators from the German Pension Insurance, insured people can calculate future pension entitlements themselves as a guide.
