Germany Scraps ‘Rente mit 63’ and Moves to Capital-Funded Pensions, Retirement Age Climbs to 70 by 2091

Germany's coalition agrees sweeping 34-point reform: pension age to rise to 70 by 2091, tax relief for middle incomes, tighter sick leave rules, and new capital-funded pillar.

The coalition government has agreed a sweeping 34-point reform package that overhauls the pension system, tightens sick-leave rules, extends fixed-term contracts, and shifts the tax burden toward high earners. Chancellor Merz, speaking at a party congress in Düsseldorf, also announced an additional action plan against social benefit abuse with details due in July.

At the core of the pension changes is the full implementation of the recommendations from the Alterssicherungskommission (Commission on Old-Age Provision) by 2026. A capital-funded pillar, modelled on Sweden’s system, will be introduced, meaning a portion of contributions is invested in equity markets. The standard pension contribution rate is set to rise to 19.9 percent by 2028, with a new sustainability factor designed to keep contributions stable over the long term.

The long-debated early retirement option known as “Rente mit 63” (pension at 63) will be abolished. Starting in 2042, the retirement age will be linked to life expectancy. The ratio of additional working years to longer pension duration is set at two-to-one. Under this formula the regular retirement age would gradually increase to 70 by 2091. Compulsory insurance coverage is also being extended: self-employed workers, politicians, and mini-job holders (marginal part-time workers) will now have to pay into the state pension system.

Alongside the pension overhaul, the reform package introduces major tax changes with a total relief volume of around €10 billion. From 2027, small and middle incomes will benefit most. A family with two children and an annual gross income of €60,000 would see a reduction of more than €600 per year from 2028. This is financed by higher rates at the top end: the top marginal tax rate will rise to 45 percent for incomes above €250,000 and to 47 percent for incomes above €280,000. The IW Cologne institute warned that the measures may not generate a significant growth boost given current economic conditions.

Labour-market rules are also being significantly loosened. Fixed-term contracts without a substantive reason can now run up to 48 months (until the end of 2030), with up to six renewals allowed. The written form requirement for such contracts will be scrapped from January 2027. For high earners, a new severance-pay option is introduced. At the same time, rules on sick leave become stricter: the telephone sick-note introduced during the COVID-19 pandemic is abolished. Employees must provide a doctor’s certificate from the first day of illness. Critics include trade unions and the German Association of General Practitioners (Hausärzteverband), and a majority of the public opposes the tightening in surveys.

To strengthen acceptance of the social system, the government plans to replace the current “Bürgergeld” (citizen’s basic income) with a new “Grundsicherung” (basic security) that features tougher participation obligations and sanctions. A dedicated action plan against benefit abuse will seek to minimise fraudulent claims through better data exchange among agencies and a new competence centre at the Federal Employment Agency.

Bureaucracy reduction complements the package: public authorities are expected to cut staff by eight percent. A “deemed approval” (Genehmigungsfiktion) will become the default in administrative decisions. Large companies with more than 5,000 employees benefit from a moderate implementation of the EU supply-chain directive. The business community welcomed the administrative simplifications, but economists at the Ifo Institute and DIW Berlin doubt whether the overall package is sufficient to achieve the government’s target of more than one percent economic growth in 2027.