Germany's incoming Chancellor Friedrich Merz pledges no cuts to state pension amid economic challenges

Germany’s incoming Chancellor, Friedrich Merz, has said that his new administration will not make any cuts to the state pension.

Merz, who is the frontrunner to take over the Chancellorship after the recent Federal Elections, will try to tackle Germany’s ageing demographic problem.

Merz is the leader of the CDU/CSU party, which recently picked up 28.6 per cent of the vote in the elections. It is expected to form a coalition government with elements of the outgoing SDP.

According to the CDU/CDU website, the party pledges that it will maintain the current retirement age and will not ‘allow’ any pension cuts.

It also says that it will introduce both an ‘active’ form of pension, where those will work beyond retirement age will receive a monthly tax-free salary of up to €2,000. In addition, the state will introduce an early retirement pension, giving all children between the ages of six and eighteen €10 a month as starting capital for a third-pillar pension.

Much of this, however, seems to be mere tinkering at the edges with any results not to be seen for generations.

As ING global head of macro, Carsten Brzeski, wrote earlier this week: “A reform of the pension system looks highly unlikely. The biggest challenge will be the financing of any new plans. Remember that the CDU/CSU had presented plans with a large funding gap during the campaign. However, we had always suspected the CDU/CSU would change its stance on the debt brake after the elections. With the Left and the Greens, there would now even be a 2/3 majority in parliament for outright changes to the debt brake.”

The debt brake that Brzeski alludes to is the 0.35 per cent of GDP that the German constitution tags as the limit of government debt. This has been one of the most prominent issues in Germany in recent years—and directly caused the implosion of Olaf Scholz’s government at the end of last year. For the Constitution to be amended, two-thirds of Parliament need to be in favour. The fractious nature of coalitions has so far made this subject the hottest potato around.

Merz has bigger, more immediate issues. The German economy is continuing to tank.

“[Germany’s] economy shrank slightly in 2024,” wrote the New York Times this week, “after adjusting for rising prices. Forecasts for this year don’t look much better. And other measures look even worse. They show an economy rapidly sliding backward, stunning declines that have emerged as one of the biggest issues in the parliamentary election set for Sunday.”

Others have pointed to the fact that Merz and the CDU/CSU have not received the ‘sweeping mandate’ that they were hoping for. In fact, wrote DWS Asset Management this week, the victor’s win was more the loser’s loss—Scholz’s SDP being absolutely decimated in the election.

Merz, then, comes into office with a mandate to make huge changes but without the bandwidth to do it. And despite the turnout on the streets of Berlin this weekend and voters coming out in larger numbers than ever before, the AfD Party placed second in the elections, with 20.8% of the vote. If Merz’s new government disappoints like its predecessors, this may open a door back to fascism.



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