Germany’s Pension Crisis Explained: Why the System Is Running Out of Workers

Germany’s state pension system is facing a structural funding crisis caused by an ageing population, low birth rates, and a shrinking workforce — a problem policymakers have struggled to confront.

Dear Reader,

Have you ever wondered what you are doing in Germany — where you fit into this well-oiled industrial machine? The blunt answer is this: you are here to help plug a growing hole in the country’s pension system.

Germany’s state pension model is facing a structural funding crisis caused by an ageing population, low birth rates, and a shrinking workforce. The system is based on a pay-as-you-go principle, under which those still working finance the pensions of those who have retired.

For decades, that social contract held. But as the baby-boomer generation leaves the labour market en masse, the number of contributors is falling while the number of recipients is rising — and Berlin is scrambling for workers to keep the system afloat.

Every party in Germany favours some form of skilled labour migration (yes, even the AfD) because they know that without well-paid foreigners contributing to their fragile pension scheme the whole thing will collapse.

German state pensions are based on a system whereby those still working pay the pensions of those who’ve crossed over into the third phase. The more you paid in, the more you got out at the end, a principle known as Teilhabeäquivalenz.

That was a very manageable social contract as long as the baby boomers were still on company payrolls. But, as the plentiful post-war generation makes a permanent move onto the deck chairs of Mallorca, that deal is becoming ever harder to maintain.

Yes, politicians have seen this issue lumbering over the horizon for decades now. But the solution has been one chained to the logic of a four-year election cycle - hide the discrepancy in the tax system!

Reforms of the pension system in the 1990s and 2000s made it progressively easier to make up for the difference between incomings and outgoings by transferring money from the federal budget to fill the gap. This solution necessarily leads to higher taxes on the young, eroding the Generationsvertrag on which the system is based.

Just how big the pension deficit has become is illustrated by the fact that over a quarter of the entire federal budget last year went into balancing out the pension books. That figure of €100 billion is so large it could fund the combined budgets of the ministries for international development, interior, health, families, and education.

On the bright side, things could have been a lot worse.

Economists in the 1990s proposed ditching the whole system, saying it would soon become unaffordable. But successive governments managed to stabilize it by cutting the pension level, pushing up the retirement age to 67, and bumping up the numbers on the ‘paying in’ column.

There are ever more pensioners in Germany. Photo by Huy Phan on Unsplash

Why migration only delays the problem

And that’s where you and I come in.