Pensions in Germany - what you need to know (and do) to benefit
February • 10th, 2020
by The Expat in the City Team & MW Expat Solutions
Social Insurances in Germany: the Pension System
In Germany, social insurance is a closely regulated system of state provision for important risks that come with living. It’s an insurance system in which the insured risks, such as illness, maternity, need for long-term care, industrial accident, occupational disease, unemployment, reduced earning capacity, old age and death, are carried jointly by all insured persons.
These insurance types are:
- Gesetzliche Rentenversicherung: Statutory pension insurance (in 2020 18.6% of your gross income)
- Krankenversicherung: Public health insurance (in 2020 approx. 15.7% of your gross income)
- Arbeitslosenversicherung: Unemployment insurance (in 2020 2.4% of your gross income)
- Pflegeversicherung: Long-term care insurance (in 2020 3,05% of your gross income)
These insurances are the cause that your net income is considerably lower than your gross income. In summary, a little under 40% of your gross income goes to the various social insurance schemes. The good news is that the employer pays half of it when you have a labor contract.
How does the system work?
In Germany, anyone (with a few exceptions), who earns a living has to pay into the pension system. The contributions are charged at a rate of 18,6% of your salary. As an employee your employer will pay half. This means that as an expat working in Germany, you too will have to pay into this scheme.
Important to know for expats
Important for you to know as a newcomer to Germany is that until you have paid into the 'GRV' for 5 years, you have no cover for old pensions or disability pensions. The other rule that you need to be aware of is regarding the disability pension: once you have qualified, you have to have spent at least 3 of the last 5 years paying into the system to be covered. This means that depending on the system that is in place in your home country (the rules are similar in many countries); there will be a time when you benefit from no cover whatsoever.
The only way to cover your risk during that time is to make private provisions. To protect one‘s income an Occupational Disability Insurance covers the risk of losing your income because you can no longer work due to illness. Private pension schemes help you to close the gap between the public old-age pension (today roughly about 45% of your last salary) and your financial needs.
Good to know that if after the five years, you are entitled to a German retirement pension also when you move back home. When you have not paid for a full 5 years then it is possible to get your contributions back (not the employer’s) but they do make this quite a complicated process.
The expected pension is determined by how long you've paid into it and how much, what kind of pension you get and when you will draw the pension.
Information about your pension
Retirement age is, at the moment, 67. The expected pension is determined by how long you have paid into it, how much you have paid into it, what kind of pension you get and when you will draw the pension. Pensions are paid at different levels depending on whether you are living in East or West Germany.
From the age of 27 onwards (or as soon as you are qualified), you will receive your personal pension information from the Deutsche Rentenversicherung year after year with the current status of your acquired pension entitlements.
You will also find a projection of the amount of your expected old-age pension and the pension entitlements in the event of a possible reduction in earning capacity. You will most likely find a gap between the projected amount and your projected costs at retirement.
Changing pension levels
The changing demographic situation in Germany, with the postwar baby boom generation now reaching pension age and the low birthrate of 1.5 children per woman, coupled with a longer life expectancy (81 years), means that the generation contract can no longer offer full pension security.
There are too few workers paying for too many pensioners. By the year 2030 there will be only 2 workers paying for one pensioner, this cannot work under the current system.
Pension levels are falling all the time and the threat of old age poverty, even for people who have spent their entire life working earning the average wage, is a real one. The German government has pledged not to let the level fall below 46% by the year 2020 and 43% by the year 2030. Whether this is achievable remains to be seen.
How can you make sure your pension will be enough?
The government has realized that a state pension alone will not guarantee a comfortable standard of living, that is why they are actively encouraging German residents to save privately for their old age and prevent old age poverty. For this reason they have created private schemes that they subsidize through providing tax benefits. These schemes are mostly offered through insurance companies but are also offered on a smaller scale through banks.
These provisions are:
- Basisrente (tax subsidized)
- Betriebliche Altersvorsorge (tax and social security contribution subsidized)
- Riester (tax and fixed amount subsidies for family members)
- Private Rentenversicherung (paid from net with tax advantages at the back end - this means that during the contribution phase there are no tax saving possibilities but in the withdrawal phase it is tax subsidized.
The Erwerbsminderungsrente: disability insurance
The contribution into the Gesetzliche Rentenversicherung is for three risks: older age, disability to work, and becoming widow or orphan. The other pension that you are paying for is the Erwerbsminderungsrente: disability insurance. If, as a result of an accident or an illness you are permanently no longer in a position to earn a living, there is a state reduced earning capacity pensions in place (Erwerbsminderungsrente). It is important to realise that it will only cover a small part of your income loss.
As a general rule of thumb, if you can still work between 3 and 6 hours a day it pays roughly 20% of your last salary and if you can only work less than 3 hours a day it will pay roughly 40% of your last salary (the exact amount can be verified in the yearly letter you receive from the statutory pension scheme, the Gesetzliche Rentenversicherung).
You will however only benefit from this pension if you are unable to work not only in your current profession but in all others as well.
What can you do to prevent loss of income?