Germany's Statutory Pension System
May • 18th, 2021
by Martina Chalar, co-founder HORBACH Expats
Germany’s Statutory Pension System - what you need to know as an expat!
The good news? There is a social security system in Germany that includes a pension fund for your retirement
The bad news? Your contributions are not going to be enough for sustaining your living standard.
This is even mentioned in official reports from the statutory system, compelling contributors to take action privately to close their so-called personal gap.
In the statutory system, employees are compelled to contribute to the statutory pension system out of their gross income. Based on your income and to a maximum threshold you collect points, that together with further factors such as where you live and the age when you retire, determine how much pension you’re entitled to receive. The most privileged individuals receive a gross pension of 1500-2000€ (source). That is, if they retire at the prescribed official age of 67 and if they worked for many years collecting the maximum possible of 2 points yearly. Nevertheless, this is a gross pension AND it is not guaranteed.
Consequences for you as an expat in Germany
During retirement, albeit with a lower bracket than during your work life, you still have to pay taxes on your pension, due to this being an income replacement in the long run.
You are also expected to pay social security benefits such as health care and mainly nursing care costs (also a huge topic in itself for those of you staying here in the long run).
On the other side, the estimated gross sum appearing in the yearly reports you receive once you’ve qualified yourself to the benefits (i.e. 5 years of consecutive payments into the system) is not guaranteed! Because the pension system in Germany is a social system, where the current contributors’ contributions provide the pensions for the current pensioners.
But Germany’s population is ageing. Fewer people being born, people entering the workforce later, living longer, and a higher amount of elderly population in relation to the birth rates means that you cannot rely on this system. That that expected gross pension will most likely be even less than what you believe it will be.
The other side to this is that since your contributions are feeding the very much-needed funds for the current generation of pensioners this money is not being invested in any way for your future self. This also means that there is inflation to consider, eating away at your purchasing power. Because 1500€ today has a higher purchasing power than this same sum after inflation by the time you retire, leaving you with even a bigger gap.
And all of this is without even because as expats we contribute a lot less than the maximum points available and also that our pension is affected by whether we relocate to countries with social security agreements with Germany or not, as well as whether we have even qualified ourselves for the German system at all.
How to avoid old-age poverty
The German state is not oblivious to this severe risk looming upon the country’s population. So, there are many incentives in place to get people to care about their pension and start provisioning in time.
The first step to avoiding old-age poverty is to become aware of what’s your personal gap and take into account several factors such as life expectancy and inflation. Pension insurances are, after all, long-term investments with a layer of insurance protecting you mainly against longevity. Which comes with its perks. The different investment instruments are private contracts offered by many different companies and classified into 3 main groups (layers):
All of them have different tax benefits and different flexibility options both before as well as during retirement which you can profit from regardless of where you come from and how long you plan on staying in Germany.
Figuring out how much you should be investing to cover your gap has a lot to do with how far you are in your financial planning, the current state of your finances and personal planning, as well as with the type of life you envision for yourself. In which building blocks it makes sense for you to invest is then based on your preferences, existing investments, and life plans. Which makes pension planning one of the most complex yet exciting fields in financial planning. Especially when international portfolios are involved!
Why take care of your pension now?
1. There’s no such thing as staring “too early”
Everyone faces an individual gap which increases as time goes by. What you receive from the social pension fund will be less than what you need to maintain your living standard. We calculate this for our clients daily. Here keep in mind that it is always better late than never. Nevertheless, we strongly advise in favor of investing small amounts for a longer period, to profit from the compound interest effect the most. The best time to start is when you are born.
2. Individual and flexible
Regardless of where you come from, how long you plan on staying, or the degree of clarity you have when it comes to your personal planning, there are investment options for everyone out there, taking into consideration different risk tolerances and more specific preferences such as sustainability-oriented investments.
Varied options for different people
Which of these layers makes sense for you depends on your occupation. This does not only mean the field of occupation but also the hierarchical position. The situation is not the same for a freelancer or a business owner or a student or an employee in a managerial position. Additionally, whether you have a family, whether/how long you want to stay in Germany, and several other variables are important too. If you want to know more about which one is the best for you ask us for an individual consultation free of charge.
Questions? We are here for you!
By now, you are probably wondering: From which layers can I profit? How big is my personal gap? Is there an impact on my pension when I have to move back home? What is the impact of Corona on my pension?
We understand you have several questions. If you have specific personal questions and want them answered right away, we are happy to help you! Just scan the QR and easily get in touch with our consultants:
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