Germany’s 2028 Pension Overhaul: A Capital-Funded Pillar Joins the Pay-As-You-Go System
Published on 07/30/2026 at 06:22 | Redaktion boerse-global.de
Chancellor Friedrich Merz has reshuffled his cabinet in a bid to push through one of the most ambitious reforms to Germany’s statutory pension system in decades. The centrepiece: a capital-funded pension pillar that will supplement the existing pay-as-you-go model starting in 2028.
The move comes as the government faces mounting pressure from employer groups, who warn that the combined cost of retirement provision could soon exceed 22 percent of gross wages. According to the Federation of German Industries (BDA), employers and employees would have to shoulder an additional €40 billion annually, pushing the total social security contribution rate to 46 percent.
A Three-Tiered Transition
From 2028, workers will pay a supplementary contribution that rises incrementally to 2 percent of gross income by 2031. Employers and employees split this cost equally. The reform divides insured individuals into three categories:
- Retirees before 2028: Unchanged, remaining under the pure pay-as-you-go system.
- Transition phase 2028–2031: Pensions consist of a mix of pay-as-you-go and proportional capital-funded components.
- From 2032 onwards: A tax-financed transition factor kicks in, expected to remain in place until the mid-2040s.
A so-called “safeguard line” guarantees a pension level of 48 percent until 2031. After that, damping factors may cause pension increases to lag behind wage growth.
Economic Backlash and Alternative Proposals
Employer associations have launched a fierce campaign against the plan. They argue that raising the retirement age and eliminating early-retirement exemptions would be more effective. A DIW analysis commissioned by the Bertelsmann Foundation supports this view: raising the earliest possible retirement age from 63 to 64 would have already saved the state hundreds of millions of euros.
Cabinet Reshuffle Signals Urgency
To secure the reform’s passage, Merz replaced key ministers in late July. President Frank-Walter Steinmeier appointed three new cabinet members: Nina Warken as head of the Chancellery, Carsten Linnemann as health minister, and Steffen Bilger as transport minister. Thorsten Frei will lead the Union parliamentary group.
The reshuffle followed the resignation of Jens Spahn in mid-July. The new ministers are tasked with coordinating draft legislation by the turn of the year. Yet dissent is brewing within the Union, particularly over plans to scrap the penalty-free pension after 45 contribution years—a move opposed by several eastern German state premiers.
Private Provision Gets a Makeover
Alongside the state pension reform, the Bundesrat has approved a new retirement savings account, set to replace the Riester standard from January 2027. The account allows more flexible investments in funds and ETFs, partly without mandatory capital guarantees, while retaining state subsidies.
The broader reform package also includes tax adjustments: child benefit will rise to €272 in 2028, the employee lump-sum allowance will increase, and the flat tax on mini-jobs is set to climb from 2 to 5 percent. Existing pensioners will be largely unaffected, though a new allowance in basic income support is planned for them.
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