by Lea Hauke
Updated on June 16, 2023
The German pension system explained
The German pension system ranks among the best in the world. Although the concept is reformed continually, it has consistently relied on three pillars: state pension, occupational pension and private provision. With a “pay-as-you-go” system in which pensions of the currently-retired are funded by premiums paid by the working force, the German pension system follows strict rules to ensure that everyone has a secure financial future.
If you are thinking about living and working in Germany, you may have some questions about the German pension system. In this article, we’ll take a closer look at the origin of the German pension system, how it works and who is eligible for a German pension.
Germany was the first nation to establish an insurance program for people who were no longer able to work due to age or any kind of disability. Germany’s pension system has been in action since 1882 and was designed by Germany’s then-chancellor, Otto von Bismarck. While the retirement age in 1882 was set at age 70, it was lowered to 65 in 1916. The standard age for retirement today is 67 if you were born after 1964.
The German pension system relies on three pillars. These pillars include public pensions, company pensions and private pensions. All employers and employees must contribute to the mandatory state pension, also known as Gesetzliche Rentenversicherung.
Germany’s social security system uses the funds paid by current workers and employers to pay the pensions of retired workers.
In order to improve one’s own pension, there are extra measures that can be taken. Some companies offer additional pension schemes for employees, for example. Further, you can take matters into your own hands and invest in individual pension insurance in order to receive more when you retire.
Next to the mandatory state pension, which builds the basic requirements for pensions in Germany, there are two more options to consider. Some companies offer company or occupational pensions (betriebliche Altersvorsorge) as an additional opportunity to collect money collectively and improve pensions. Another option is to invest in private pensions to top up one’s retirement salary. Different providers like banks or insurance companies offer individual pension plans.
Here’s a breakdown of the three types of pensions in Germany:
Employees working in Germany contribute 18.6% of their gross salary to the German Rentenversicherung. Contributions are deducted by the employer: the employee pays half, and the employer pays the other half. Once you start working in Germany, you will get a social security number that helps track your contributions to the German pension system.
You are eligible for a state pension after five years of service. Times of unemployment like parental leave or time spent for further education can also add to your pension. The rules of the German pension system apply to German citizens as well as to foreigners. How much pension you receive at the age of retirement depends on the amount of money you’ve contributed over time.
After you start working in Germany and have mastered different challenges like the Anmeldung, you are already contributing to the German pension system with part of your monthly salary. After five years as an employee or being self-employed in Germany, you are eligible for retirement pay. With a mandatory state pension as well as other voluntary options like company and private pensions, you have several ways to put yourself in a position to receive a generous pension upon reaching the legal retirement age. As bureaucracy is known to be excessive in Germany, an advanced language course can help you when getting your affairs in order.
