When it comes to pensions, more than 30 million employees in Germany rely on the pillar of state pension. However, due to the negative demographic development in Germany,  the level of pensions will continue to shrink in the coming years, and fewer workers will have to finance more pensions in the future. In order to secure the standard of living in old age, additional private pension planning is therefore becoming increasingly important.

The German pension insurance (DRV) is part of the 1st layer of the German pension system. The DRV was founded in 1891 by the German Reich Chancellor Bismarck, and states that all employees must pay into the DRV. Standard pensions begin at the age of 67, and early retirement from 65 onwards is only possible to a limited extent, but for costs insured persons, there is about a 10 percent deduction from their pension. Self-employed persons may become voluntary members. Freelance professionals such as doctors or lawyers can join their own pension funds instead of the DRV. Public servants are not in the DRV; they receive a separate pension from the state.

Important: You must have deposited for at least five years (>60 months) to receive a benefit. If you have worked in Germany for less than 60 months, when you return to non-European countries, you can demand your contribution share back after two years of leaving Germany. Upon request, we can help you together with our network of professionals. The contribution rate is currently 18.9 percent, half of which is to be paid by the employee and half by the employer. The billing and bank transfers are automatically carried out by the employer. No account – no interest rate – no capital formation. The DRV works according to the pay-as-you-go system. Also known as an intergenerational contract, working-generation pension contributions are used to finance the current pensions of the elderly. First in – first out. The DRV always speaks of a “pension account”. In fact, this account does not contain any capital that is personally allocated to the insured person. Through first in – first out, it is also not possible to create any capital that could bear interest. The DRV may only have a minimum reserve of 1.5 months‘ expenditure in the Fund. The DRV must not accumulate any surplus.

Demographic problems

The DRV’s pay-as-you-go system is economically dependent on the number of contributors and their income. In the past 30 years, pensions in Germany had to be cut mainly because of mass unemployment and the corresponding lack of premium payments. Also, demographic problems will arise when the last baby boomers retire from around 2025 onwards. For 50 years now, birth rates have been declining. Every retired couple has on average only 1.4 children, who would have to bear the pension burden for both their parents. The DRV takes a mixed approach to this situation: contributions will soon have to rise and pensions will fall. As a result of various pension reforms, the net pension level (supply ratio) has decreased, i.e. the comparison of net pensions to the last working income before retirement.

In 2004, the average pensioner received about 50 percent of his final income as a pension. By 2030, this figure is expected to fall to around 43 percent. One reason for this is the Riester legislation (see Riester pension). Another reason for this is a major tax reform (age-related income act), in which two tax steps were introduced. Since 2005, pension contributions can be deducted from tax at an annual rate (100 percent as of 2025). On the other hand, pension payments are becoming increasingly taxable (from 2040 onwards). Example: A pensioner who retired in 2015 has to pay 70 percent tax on his pension for life. A new pensioner in 2020 will then be subject to a permanent rate of 80 percent.

TIP: This principle of taxation also applies to the newly created Basis/Rürup pension in Germany. Rürup plans have special tax advantages and are attractive for self-employed and high-income employees.

Calculate retirement pension: As soon as you have completed the 60 months of premium payments, you will receive annual information from the Federal Pension Fund.

However, as an expatriate, you can also easily calculate your pension entitlement at 67. Here is an example of a ten-year work stay in Germany: Monthly gross salary divided by 100 multiplied by working years = pension (4,000 euros / 100 × 10 years = 400 euro pension (minus about 10 percent health and nursing care insurance).

Disability benefit: Also, when there’s a disability, DRV pays disability benefits. In addition, since joining the DRV on the basis of previous income, it calculates old-age pension claims up to age 62. The fixed legal age is 62.

In addition, continuing the pension example from above: you came to Germany at age 32, worked for ten years and earned a gross average income of 4,000 euros. This corresponds to 400 euro pension entitlements. Now you are 42 years old and disabled. In this case, the DRV will add 20 years or more to your calculation: 400 euros in ten years equals 1,200 euros in 30 years: 1,200 euro monthly pension in case of disability. In most cases, however, only half of this amount is paid because the DRV assumes that you can still work 3–6 hours a day.

This realistically means a disability pension of 600 euros. And a big loss of income. You should, therefore, make sure you set up a decent income protection plan with private insurances for yourself to cover this major risk in your financial planning for the future.