Germany's public pension is not enough to provide you with a comfortable living in old age. It should be seen as a minimum pension. In practice, it leaves many without an adequate minimum pension, especially women who worked part of the time, self-employed and those who arrived late in life in Germany.
The key points
- Germany's public pension: a general overview
- How much will my public pension be in Germany?
- Voluntary contributions to the German state pension
- Pension points for parental leave
- When you can no longer work: Disability pension rights
- Tax and social security contributions on your state pension
- Can I retire early and still draw my GRV?
Germany's public pension: a general overview
Do you live in Germany and work as an employee? Then you are also compulsorily insured in the German public pension plan as virtually all employed people in Germany have to pay into the official pension system 'Gesetzliche Rentenversicherung', GRV for short.
The GRV's standard retirement pension age is currently 65 and nine months, and it will gradually increase to 67 by 2029. So when you are born after 1964, you have to work until you are 67 to get a GRV without deductions
The GRV is a so-called pay-as-you-go system which means that current employees pay for current retirees. Therefore the pension will deteriorate as the number of pensioners will grow rapidly compared to the number of working contributors. It is complex to predict how much you will actually get in retirement.
How much will my public pension be in Germany?
Your pension is determined foremost by the number of pension points or 'Entgeltpunkte' you have collected. For every year of average income contribution, you earn one point. For the maximum contribution (at a salary of currently €7.050 per month in West Germany) you earn about 2 points, or to be precise 2,17 points.
To calculate your German state pension you need to multiply these pension points with the current pension value or 'aktueller Rentenwert', currently 34.19 € (in West Germany). So when you pay about 30 years the maximum contribution and collect 60 points, you will earn a maximum pension of 2.051,40 € in the west per month. Your personal tax rate is then deducted from this pension. (See Tax and social security contributions on your state pension for more information on that.)
Then there is the so-called entry factor or "Zugangsfaktor". In essence, this number is 1. But if you retire early it will be adjusted down (0,3% per month), and if you retire later it will be adjusted up by 0,5% for each month that you do not receive a pension after reaching the standard retirement age.
Will my public pension in Germany keep up with inflation and general wealth trends?
If you ask whether your GRV will grow with the general inflation, the answer is: Yes! As the public pension in Germany is paid by those working at that time, the contributions into the system and the potential payout automatically increase with the average wages. Since average wages grow faster than inflation, pensions should be able to keep up with inflation. In 2022, for example, the pension adjustment will be a solid 6.12%, which should even compensate for the current high inflation.
However, this also means that if the population buildup worsens as fewer young working people pay for more pension receiving old people, then the economics of the GRV deteriorate. Wages normally rise about 1% faster than inflation, but we expect that this space has to be used to offset the worsening economics of the GRV. The bottom-line: We expect that as a result pensions will keep up with inflation but not with the general living standard.
Where do I find the number of points I have already earned?
Every insured person who is at least 27 years old and has already paid into the German pension insurance scheme for five years is sent their official pension information (“Renteninformation”) per mail annually. This information has circled each noteworthy piece of information you receive. Unfortunately, this overview is only available in German.
The earliest date you can begin receiving your pension
Your pension amount if you would receive a full disabled pension
Your current entitlement to an old-age pension
Your projected pension entitlement if you were to continue earning the same amount as you do now, and
The amount of your pension, if you had an annual increase of 1% or 2%.
Please note: the values given on the pension information are static estimates, based on today's figures. In reality, your pension may develop quite differently!
Voluntary contributions to the German state pension
Even if you are not compulsorily insured in the GRV, you can pay in voluntary contributions, if you are older than 16 years and if one or more of the following points apply to you:
Some self-employed and freelancers (note that registered craftsman and self-employed with one client are already compulsorily insured)
German citizens living abroad
Adults with either an unpaid job (i.e child-raising) or one that pays too little for the insurance contributions threshold, and
Residents in the EU (including citizens and non-nationals) and those in countries with social security agreements with Germany if they have made at least one contribution to the GRV.
If you are part of this group, you can buy pension entitlement points by making special contributions. As a voluntary contributor, you can determine the number and size of your contributions freely, provided they are between the maximum and minimum contribution that applies for the year. Paying the maximum amount earns you just over 2 points. You can pay the amount up to 3 months after the end of the year.
You can also make additional contributions for other periods in special circumstances. For instance, for years you received education but that did not count. You can make these contributions up to the age of 46.
Tip: If you are close to the retirement age, it can make a lot of sense to voluntarily contribute to the GRV if you can. For those that live long (e.g. educated women), and those who are not so good at investing, this age starts earlier. In a few cases, when you are young and you move to some countries outside the EU and are not a German citizen, it could pay to request a refund and invest it yourself.
Self-employed can voluntarily choose compulsory insurance
If you do not belong to the self-employed group that is compulsorily insured* in the GRV, you can opt to voluntarily enroll in this mandatory insurance (‘freiwillige Pflichtversicherung’). However, the decision should be well-considered, because once you are enrolled, the voluntary mandatory insurance is irrevocable.
You can then choose between a fixed fee (called standard contribution) or an income-dependent one. The standard contribution fee is currently 611,94 € per month in West Germany and 579,39 € in East Germany. You can also opt for half this fee within the first three calendar years after the year in which you start to work self-employed.
When you opt for the income-dependent contribution you pay 18,6 % of your gross income in your last income tax assessment. In 2022, the minimum contribution is 83,70 €, and the maximum is 1.311,30 €. Tip: If you are self-employed and have modest assets the GRV maybe a much better solution then the guarantees insurance products that are on offer. Especially later in life (over 55) it can be worth it. The benefits of the GRV is that it pays your full life, grows more or less with inflation and incurs no cost ! A private pension plan invested in good stock ETFs is a superior long-term alternative especially for those starting earlier or having larger financial cushions.
* excluding craftsmen and home tradesmen, teachers, midwives, educators and persons employed in nursing, artists and publicists, self-employed persons with one client, maritime pilots and coastal boatmen and fishermen - these are compulsorily insured in their own employers' liability insurance association.
Pension points for parental leave
Parents with young children often have a hard time earning good retirement points because at least one parent usually stays home for some time. To compensate for this circumstance, pension points can also be collected for parental leave:
You can earn half a pension point per child per half a year for up to 2 ½ years old if the child was born before 1992, and up to 3 years if the child was born after 1992. In principle, the points accrue to the mother, but parents can together declare that they should go to the father. For 3 kids you can collect 9 points, which is quite substantive. You can only collect the points when the kids are raised in Germany, and during the first 3 years. If you have two children in the 3 year period, then the period for the youngest child is extended by the overlap. Eg. If child 2 was born exactly 2 years after the first child, you can claim points for child 1 in years 1, 2 and 3, and for the second child in years 4, 5 and 6.
The points can also be allotted to grandparents, provided they don't already receive a pension. As the German pension insurance does not usually know you are raising a child, you have to report this yourself.
For details see this official brochure.
The minimum qualification period
In order to be entitled to a statutory pension at all, you must work in Germany for at least 5 years and pay into the GRV. If you do not meet this required minimum qualification period (‘Mindestversicherungszeit’) you can seek a refund of your pension or contribute voluntarily.
In order to qualify for the five-year minimum, you can count the years that you contributed to (or otherwise qualified for) the official pension systems in all EU countries and those with a social security agreement with Germany. The official statement from the German pension fund is in this regard: "All insurance periods which you have completed in other member states and which do not overlap with German periods will be taken into account."
When you can no longer work: Disability pension rights
Unfortunately, not everyone is lucky enough to stay healthy and able to work until they reach retirement age. Suppose you can no longer work due to an accident or illness. In that case, in Germany you are entitled to a disability pension (‘Erwerbsminderungskeitsrente’ or short ‘EU-Rente’), which is proportional to the regular pension that you have built up. So if you already built up a nice entitlement to a state pension you could rely on a state disability pension, otherwise not.
If you are only able to work three hours or less per day, you will receive a full disability pension. And if you are able to work between three to six hours per day, you will receive a partial disability pension which is half of the full disability pension. Your ability to work will be checked with medical records and attempted rehabilitation before pensions are given.
Note: This check is only about a general ability to work, not whether you can continue in your current job. You may be forced to take a job in a different field where you can still work.
You must have been insured with GRV for 5 total years of your life (these 5 years do not need to be contiguous) and paid pension insurance for 3 out of the last 5 years before the illness or disability request. And you must be under the regular GRV retirement age to obtain such a pension. Whether you have a partial or a full disability pension determines your pension entitlement.
The amount of the state disability pension depends on your individual pension entitlement. The number of years of contributions to the German pension insurance scheme and the number of pension points accumulated are important factors. The calculation of the disability pension also takes into account the period up to the statutory retirement age.
Your pension amount is multiplied by 0,5 if you have a partial disability pension and by 1 if you have a full disability pension. In calculating your pension amount, this factor is called the pension factor or 'Rentenfaktor'.
If you are young or have not yet spent much time working in Germany, you will not have been able to accumulate many pension points. In this case, your disability pension will be increased by the so-called additional calculation period (“Zurechnungszeit”). Therefore German pension insurance calculates an average value of your previous contributions for the period from the beginning of your incapacity for work until you reach the regular retirement age. The fictitious pension points calculated in this way are then added to the calculation of your disability pension.
But: In most cases, the reduced earning capacity pension is not even sufficient to cover the most essential living costs. On average, it currently amounts to only €830! It is therefore advisable to take out additional private insurance.
In Germany there is also a widow(er)'s pension that is linked to the build up size of the official state pension. For younger people, this is quite insufficient, especially if you have children and absolutely when there is just one income earner. Therefore in these cases, you need to consider additional coverage by private life insurance. This is available at a low cost. See here for an article that provides insight into the size and cost of the insurance.
In old age, this widow(er)’s pension can be helpful, especially in light of the fact that many women have a rather low state pension.
In principle, you are entitled to the widow(er)'s pension if you were married to your spouse until they died. You would have to be married for at least one year unless your spouse died in a sudden accident, then shorter marriages are also taken into account. Your partner also has to have paid a minimum of 5 years into their pension insurance.
Note: Whether you actually lived together or separately is irrelevant. But if you were only engaged, lived together without marriage, or were only married religiously in Germany, you will not be entitled to a widow(er)'s pension.
There are two types of pension for a widow(er): the small and the large pension.
You receive a small pension if you are younger than 47, and you are neither disabled nor without a child. The widow(er) receives 25% of the deceased spouse's built-up pension for up to 24 months after their death.
You are entitled to a large pension if you are either older than 47, disabled or raising a child either on your own or a child of the deceased who is younger than 18 years old (unless they are disabled in which case their age is irrelevant). The widow(er) is in this case entitled to receive 55% of their deceased spouse's pension until they die.
Accruing pension points in times of unemployment
Even with good qualifications and a high level of motivation, it can still happen that you are unemployed for a certain period of time. In this case, in Germany, you will not only receive unemployment benefits (if you meet the requirements), but you can also continue to earn pension points.
If you have paid at least 12 months into unemployment insurance within the past 30 months, and you on this basis receive the so-called unemployment benefit I, you accrue pension points based on 80% of the gross salary you earned the last 12 months. If you are seeking employment within Germany, you receive these benefits for up to 6 months. In contrast, if you are seeking a job in another EU member state, these benefits last up to 3 months after you become unemployed.
If you have contributed compulsorily for a longer time during the 5 years before claiming unemployment benefits, you could get these benefits for longer. However, how long you get such benefits depends also on your age:
If you can work, and are unemployed, but are not entitled to unemployment benefit I, you can apply for unemployment benefit II. In other countries, this would be called social welfare. It is "means-tested", and in this case, however, you do not accrue any points towards a pension.
Pension rights for studying, mini and temporary jobs
For any job that lasts more than 3 months, including a mini job and student jobs, you accrue pension rights commensurate to your income. If your job started out as a shorter-term one but is extended, then it will still be treated as a longer-term job and pension rights accrue. There are no longer any special exemptions for students: i.e. studying does not earn you pension points.
Tax and social security contributions on your state pension
We already mentioned it at the beginning: your personal tax is deducted from your GRV pension. Your tax rate in retirement will be different than during your employment:
Your actual net income during your working life and in retirement depends on your tax class, which is determined by your personal circumstances. Are you single, married, divorced or widowed? Does your partner have his or her own income? Do you have children? These factors determine your tax class and thus your personal taxation. The following two sample calculations show that this can make a significant difference:
Can I retire early and still draw my GRV?
Of course, no one can force you to work until the standard retirement age of 67. You can retire earlier, but you will have to accept cuts in your statutory pension. If you want to stop working before 63 and have paid into the GRV for at least 45 years, you will receive a full pension at 63.
Another possibility to retire early at 63 is with deductions given that you have worked at least 35 years. Every month that you want to retire earlier costs a deduction of 0.3 percent on your monthly pension. To avoid this, you can make special payments before the official start of your pension from the age of 50. It makes sense to spread the special payments over several years to avoid exceeding your tax deduction limits.
So if your life expectancy (at 67) is the current average of 87, then you cut your pension for 20 years by 3,6% to earn one year of pension. The break-even point between deciding for early retirement using your GRV option or not is a growth rate of 2.9% in the GRV pension. In other words, if your GRV pension grows 2.9% per year for 20 years, it returns you the same amount as your extra year of early retirement pension. The shorter your life expectancy the more sense it makes to go for the early retirement option, financially.