Germany’s public pension expenditure is projected to increase to 12.5 per cent of gross domestic product (GDP) by 2060, up from 10 per cent today, according to the OECD.

Its Pensions at a Glance 2019 report, country notes for Germany, warns that rapid population ageing could challenge the financial sustainability of the public pension scheme.

“Under current legislation, public pension expenditures would rise from about 10 per cent of GDP today to 12.5 per cent in 2060 according to EU projections, despite a 10 per cent drop in the pension level due to the sustainability factor,” the report stated.

The report explained that even after a full career in standard employment, Germany’s pensioners face comparatively low pensions when compared to other OECD countries. Based on current legislation, a full-career average-wage employee entering the labour market in 2018 can expect a net replacement rate of 52 per cent, compared to 59 per cent on average in the OECD. However, this will be exacerbated by population ageing that automatically lowers pensions through the sustainability factor.

“A 2018 law puts both a floor on the point value - such that a full career at the average wage yields a replacement rate after social security contributions and before taxes of at least 48 per cent - and a ceiling of 20 per cent on the contribution rate until 2025. At the same time, additional tax money is foreseen to balance the pension budget,” the report stated.

However, the strongest effects from ageing will materialise after 2025, the OECD said, and noted that a pension commission is working on reform options beyond 2025.

“The German statutory retirement age is steadily increasing to 67 by 2031. Six OECD countries have gone a step further by introducing an automatic link of the retirement age to life expectancy to lower the political pressure of adjusting ad-hoc to rising longevity,” the report said.

The OECD said that in the future, many individuals might be at risk of old-age poverty, including groups with interrupted careers or non-standard employment contracts, such as single parents, the self-employed and platform workers.

The risk is particularly high for German women who currently suffer from the largest gender pension gap among OECD countries (46 per cent); an above average gender pay gap and the large share of women working part-time mean that future pension entitlements of women are likely to continue lagging behind those of men.

“Moving towards a largely unified pension framework for employees, civil servants and the self-employed, which exists in many other OECD countries, would help to increase pension coverage for vulnerable groups and remove inequalities in social protection,” the OECD said.

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