Pension in Germany

The German pension system is a complex and comprehensive social security system designed to provide financial support for people in retirement. It is based on a pay-as-you-go system where current workers pay into the system to support current pensioners.

The pension system in Germany has three main pillars: public pension insurance, occupational pension schemes, and private pension schemes. These three pillars are in turn divided into three different levels. Level 1 is the statutory pension and the Rürup pension, level 2 is the company pension and the Riester pension, and level 3 is the private pension.

• Pension Level 1: In level 1, the public pension insurance provides a basic pension to all people who have paid into the system for at least five years. Contributions to the public pension scheme are paid by both employees and employers, and benefits are based on a formula that takes into account previous earnings and the number of years of contributions. Public pension insurance also provides additional benefits such as disability pensions and survivors‘ pensions. The second pension option in Level 1 is the Rürup pension. This is a private pension product that is structured similarly to public pension insurance in terms of its conditions. The advantage here is that you enter into a contract for yourself, which means that you do not support other pensioners with it. This is a very good alternative for self-employed, freelancers or employees who want to save additionally for their pension, as the payments are tax-deductible.
• Pension Level 2: In Level 2 is the occupational pension scheme, which is provided by employers for their employees. This is an additional source of income for retirement. It is often structured as a defined contribution plan, where the employer (at least 15%) and the employee make contributions to an individual retirement account that is invested to provide a retirement income. In addition to this, there is also the Riester pension in Level 2. This is a private pension that is subsidized by the state and tax-deductible. The Riester pension can be a very good additional retirement product for families as you get 300€ in governmental bonuses for each child.
• Pension Level 3: The level 3 private pension is a voluntary contribution in addition to the public pension savings. This additional pension savings option can be incredibly useful, as the average state pension in Germany is 1.361€ for men and 1.148€ for women. Unlike the other insurances, the Level 3 private pension does not offer tax savings in the payment phase, but in the payout phase. This has some advantages. First of all, the taxes in the pension phase are very low. In addition, contributors gain enormous flexibility and can also use the private pension as collateral for a real estate investment.

Currently, the retirement age in Germany is 67. However, this is likely to be raised gradually in the future, as the German public pension system is currently running an extremely high deficit (100 billion in 2022). Nevertheless, every person in Germany has the option of retiring earlier or later. However, if you retire earlier, you can expect lower benefits, while if you retire later, you can expect higher benefits.

Overall, the German pension system is a complex and multi-layered program that offers financial support to people in retirement. Although it is not easy to navigate, it is an essential part of social welfare in Germany and it is important that everyone understands how the system works and what benefits are available.