New reports out of Germany and Europe have illustrated how precarious a position the nation’s pension system finds itself.

The reports, Early, Standard, Late: When Insurees Retire and How Pension Benefit Reductions and Increases Could Be Determined by the Bundesbank and OECD Economic Surveys: Germany 2025 by the OECD pay particular attention to the nation’s pension system, which is struggling to cope with an ageing demographic and has remained a focus in recent weeks with mooted changes.

In Germany, the situation is summed up by the country’s own Bundesbank as one of "considerable pressure" on the labour market and the government’s finances.

“There are more and more pensioners but fewer and fewer people paying into the statutory pension insurance scheme. How much of a burden this becomes will depend on how long people work in old age and when they retire," the Bundesbank stated.

"The higher the level of employment, the greater the growth potential. Revenue from taxes and social contributions also increases. This eases the strain on government finances and social security funds. The design of the statutory pension insurance scheme plays a particularly important role in the decision when to retire.”

Given the situation, the Bundesbank said that it thinks that the minimum age of retirement should be reviewed, considering the demographic challenges.

One of these, it said, would be to link retirement age to life expectancy after 2031 and end preferential treatment. As life expectancy rises, the Bundesbank stated, there is an argument for adjusting the minimum retirement age.

The institution added: “In addition, the authors suggest that, in view of the demographic challenges, it would also make sense to scrap the early reduction-free pension.

"This rule constitutes preferential treatment. It means that the contribution payments of people receiving the reduction-free pension are more heavily weighted than those of non-recipients. The rule has thus led to a significant decline in the average actual age at retirement.”

Additionally, the OECD was of a similar view; in its report, it wrote that reform of the pension and health systems is "essential" to reduce the spending pressures brought about by an ageing population. Like the Bundesbank, it also advocates coupling the retirement age to life expectancy while continuing to increase efficiency in healthcare.

However, the OECD took a different view from the one most recently advocated by the new German administration. Instead of the recent proposals from Chancellor Merz that pensions should continue to be paid out of taxation, the OECD said that social security contribution rates should not be increased.

Its report stated: “However, recent reforms and reform plans are not sufficient to stabilise the pension system and transfers from the general budget to the public pension system have increased to about 2.5 per cent of GDP in 2024.

"After the 2007 decision to gradually raise the retirement age to 67 until 2031, the introduction of generous early retirement options, which allow individuals with at least 45 working years to retire without loss of pension entitlements as well as relatively low benefit reductions for individuals with at least 35 working years have reduced incentives to work longer.”

It added: “In 2018, a minimum threshold for the replacement rate (48 per cent) and a maximum threshold for the contribution rate (20 per cent) were fixed until 2025.

"The new coalition treaty intends to fix the minimum threshold for the replacement rate until 2031 and raise benefits for mothers with children born before 1992 who have low pension entitlements. Implementing these plans would raise spending pressures substantially and further reduce fiscal space for public investment and other key expenditures.”

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