Germany’s pension system a ‘time bomb’, LBBW warns

A new report from banking firm LBBW has found that demographic shifts within Germany are a time bomb that will push the nation’s pension system to its limit.

The report, Germany’s Pension Time Bomb, highlighted the drop in the country’s birth rate half a century ago to 1.4.

As a result, LBBW said that fewer people are entering a workforce that many are retiring from. This, it added, means that the country’s pay-as-you-go system will struggle to be financed by the shrinking pool of workers.

LBBW chief economist, Dr Mortiz Kramer, wrote: “The baby boomers have essentially reneged on the German ‘generational contract’ by collectively having too few children. Each year, Germany’s working-age population shrinks by about 1 per cent solely due to demographic developments, even when assuming moderate immigration.”

He added: “None of this should come as a surprise. Few trends are as predictable as demographics. Yet, as in many countries, the political class in Germany shies away from tackling this sensitive issue.

"Ratings agency S&P Global has simulated the potential future burdens for Germany, projecting that age-related costs (pensions, healthcare, and long-term care) will rise from under 20 per cent of GDP today to more than 24 per cent by 2060. Pensions would account for the largest increase.”

A compounding factor in this crisis, according to LBBW, is that Germany’s shortage of skilled workers is slowing economic growth, eroding the base of social contribution payments. Failing to correct this may result in the country’s credit rating dropping by two categories.

Despite the gloomy picture, it seems to LBBW that the current government, headed by Chancellor Friedrich Merz, has no ambition to reform the nation’s pensions. It also accuses the government of expanding the problem by extending pension benefits for mothers. This, it said, would add an additional €5bn to the deficit each year.

The solution, LBBW said, is for the nation to overhaul its pension system while working longer hours. The country, it pointed out, ranks lowest in the OECD for hours worked per employee, working 23 per cent fewer hours per year than the average.

Kramer wrote: “It’s not unreasonable, therefore, to call for longer working lives. Whenever this suggestion is raised, critics invariably point to physically demanding jobs like construction workers. But for people like me, this wouldn’t be unreasonable at all.”

He added: “Tying retirement age to average life expectancy of the general public, as currently the case, treats roofers (who engage in backbreaking labour) the same as chief economists (who, of course, work very hard as well – though differently). That’s unfair. Low-income workers engaged in physically strenuous jobs end up receiving fewer years of retirement benefits for each year of contributions.”



Share Story:

Recent Stories


Podcast: Stepping up to the challenge
In the latest European Pensions podcast, Natalie Tuck talks to PensionsEurope chair, Jerry Moriarty, about his new role and the European pension policy agenda

Podcast: The benefits of private equity in pension fund portfolios
The outbreak of the Covid-19 pandemic, in which stock markets have seen increased volatility, combined with global low interest rates has led to alternative asset classes rising in popularity. Private equity is one of the top runners in this category, and for good reason.

In this podcast, Munich Private Equity Partners Managing Director, Christopher Bär, chats to European Pensions Editor, Natalie Tuck, about the benefits private equity investments can bring to pension fund portfolios and the best approach to take.

Mitigating risk
BNP Paribas Asset Management’s head of pension solutions, Julien Halfon, discusses equity hedging with Laura Blows